The Turnaround Thesis Is Surprisingly Strong with Luckin Coffee

Luckin Coffee (OTCMKTS:LKNCY), once hailed as the Chinese coffee chain equivalent of Starbucks (NASDAQ:SBUX), has provided plenty of drama and intrigue. Long-term investors in Luckin stock, meanwhile, have had their patience and internal fortitude tested on more than one occasion.

Luckin (LKNCY) logo on the wall of a coffee shop with a customer sitting at a table below it.
Source: abolukbas / Shutterstock.com

As I’ve reported previously, Luckin stock was booted off of the Nasdaq stock exchange and currently trades on the over-the-counter markets. This unfortunate incident, however, wasn’t even the most scandalous development associated with Luckin.

In what might be compared to soap opera, Luckin was embroiled in alleged accounting fraud and a number of high-ranking officials at the company either quit or were dismissed.

Eventually, Chinese regulators decided to fine Luckin and a number of connected firms a total of 61 million yuan, which at the time equated to roughly $8.98 million. So, with all of that in the rear-view mirror, is there any reason to own Luckin stock now?

A Closer Look at Luckin Stock

Interestingly, on Oct. 16, Luckin stock closed at $5.01. That’s interesting because technically, this means that the stock wasn’t classified as a penny stock anymore.

You see, a penny stock is defined by the U.S. Securities and Exchange commission as a stock trading for less than $5. It’s typically a good sign if a stock can get above penny-stock status. Therefore, traders tend to watch that $5 level closely.

Moreover, Luckin stock bulls have attempted to push the share price above $5 multiple times since April of 2020. Generally speaking, they haven’t succeeded in these attempts.

It will be interesting to see if the Luckin stock buyers can defend this crucial level throughout the fourth quarter of 2020. Hopefully, $5 will become a support level rather than a ceiling of resistance.

A ‘Shao Me’ Story

Because the company doesn’t have a reputation for full transparency, words won’t be enough to convince the markets of Luckin’s legitimacy. Thus, dogged by scandal, Luckin has become a show-me story for legions of skeptics.

A step in the right direction is the re-appointment of Sean Shao as an independent director to Luckin’s board. This re-appointment was pursuant to a Sept. 2 shareholder meeting.

How consequential is Shao to Luckin’s future? According to InvestorPlace contributor Will Ashworth, Luckin’s future rests in this man’s hands.

That’s quite a grand claim, to say the least. Could there be merit to Ashworth’s contention? Let’s take a closer look and see if Shao is truly the right man for the job.

If the Shao Fits

In addition to being an independent director at Luckin from May 2019 to July 5 of this year, Shao has amassed a track record that ought to impress any skeptic. Here’s a shortened curriculum vitae for your perusal:

  • Bachelor’s degree in art from East China Normal University
  • Master’s degree in public health care administration from UCLA
  • Member of the American Institute of Certified Public Accountants
  • Worked at Deloitte Touche Tohmatsu CPA Ltd. for roughly 10 years
  • Served as the CFO of ChinaEdu
  • Held board and/or other executive-level positions at 21Vianet Group (NASDAQ:VNET), Jumei International Holding Ltd., Lightinthebox Holding Co. Ltd. (NYSE:LITB) and China Biologic Products Holdings Inc. (NASDAQ:CBPO).
  • Led the independent investigation into Luckin’s accounting irregularities

That’s an impressive track record. Moreover, Shao’s re-appointment was requested by Centurium Capital. In August, that company was reported to possess 11.7% of the voting power at Luckin.

Evidently, Centurium believes in Shao’s ability to turn Luckin around and help restore its standing in the marketplace. And judging by Shao’s resume, I’d say he’s a great fit for that role.

The Bottom Line

In the wake of an accounting scandal, only time will tell whether Luckin can wipe the bitter taste from investors’ mouths. However, with Shao back on board (literally), at least there’s hope on the horizon for patient Luckin stock holders.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.


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