Luckin Coffee (OTCMKTS:LKNCY) is in the middle of a renaissance, of sorts. Over the past three months, Luckin stock has gained 80% through Oct. 23. Things are looking so good for the disgraced Chinese coffee company that InvestorPlace contributor Luke Lango recently suggested its revival could net you 1,000% gains.
1,000%. That’s awfully enticing.
There’s only one problem: Luckin hasn’t reported its results since November 2019.
A New Accountant
My colleague points out that it’s supposed to report earnings in November. Still, since it only appointed a new accounting firm — Marcum Bernstein & Pinchuk LLP (MarcumBP) — in mid-September, the lack of any information on the company’s investor relations page suggests it’s going to take a while for investors to be brought up to speed on the company’s actual sales.
Yet, Luckin stock has gained 80% over the past three months and is trading near $5 for the first time since the spring. Of course, that was before the sales fabrication issue knocked its stock for an 80% haircut after the company’s confirmation of the sales discrepancies in early April.
That’s an ironic symmetry of numbers.
The last time I wrote about Luckin was on Sep. 21. I argued that former and now current director, Sean Shao, was a possible answer to the company’s troubles. Most certainly, Centurium Capital, one of Luckin’s largest shareholders, feels this way. It was the one who pushed for Shao’s reappointment.
However, I also highlighted InvestorPlace contributor Mark Hake’s 51-cent estimate for Luckin stock. I don’t believe he’s written about it since August. I’d be curious to see how he values the company’s stock two months later.
But I digress.
The True Value of Luckin Stock Has Yet to Be Revealed
As far as I can tell, investors have pushed Luckin’s share price higher for three reasons. They’re listed chronologically from oldest to newest.
- Sean Shao’s re-appointment to the board. Shao was officially put back on the board after the company’s Sep. 2 vote by shareholders.
- Appointment of new independent auditor and accountant. As I said earlier, MarcumBP was appointed to replace Ernst & Young Hua Ming LLP. The appointment was made official Sep. 18. As the announcement stated, the company is working with its new accountant to get out its annual Form 20-F, which requires “foreign private issuers” to file an annual report within six months of the end of a fiscal year.
- Luckin fined for indiscretions. Lastly, the company was fined the equivalent of $9 million Sep. 23 by the Chinese State Administration for Market Regulation. My colleague, Luke Lango, who thinks you could make a 1,000% return on Luckin, had something to say about the current state of affairs.
Under normal circumstances, that should have happened by June 30. As I write this, Luckin is four months past due. It most definitely is time to put up or shut up with regards to sales and earnings.
“The C-suite has been reshuffled. Bad actors have been removed. The internal investigation into the fraud has wrapped up. Luckin’s Nasdaq de-listing has already happened. The numbers have already been restated. Some fines have already been levied (and to date, they’ve been nothing more than slaps on the wrist),” Lango wrote Oct. 12.
He suggests that lots of Chinese are still buying coffee at Luckin locations, as evidenced by social media commentary. So, all is good.
But is it really? Luckin fabricated nearly $300 million in sales, and it was fined just $9 million or 3% of the revenue in question.
Investors Have No Way to Know If Things Are Better
Isn’t anyone worried that if the Chinese government is willing to turn a blind eye to this kind of transgression, there’s a real possibility that other shady activities could happen in the future with little or no consequence?
Let’s face it.
When you invest in China, you continue to take a risk knowing that the regulatory oversight isn’t nearly as robust as here in the U.S. Portfolio manager Michael Dzialo, who’s run Managed Asset Portfolios LLC since 2000, believes the earnings manipulation in China is significant.
“MAP has long avoided investing in Chinese companies – for good reasons. China’s corporate governance is weak, and the legal system does not do nearly enough to weed out frauds and regulate businesses. Even Chinese firms listed on U.S. exchanges aren’t subject to the same accounting oversight as publicly traded U.S. based companies,” Dzialo wrote in May.
“Short-sellers, who make their money when the price of a company goes down, have found an abundance of U.S. and foreign listed Chinese companies to bet against. While there will always be diamonds in the rough, there are also landmines. We strive to avoid those landmines.”
One of the landmines listed by the portfolio manager is Luckin Coffee. And for a good reason. It committed fraud within a year of its U.S. IPO listing.
Up 80% in one month and trading near $5, you have to be insane to buy its stock before the 20-F is out and the company’s done a reasonable job assuring investors that the worst is behind it.
Until then, you’re taking a huge risk on your capital, with absolutely no financial evidence the business remains healthy.
But that’s just one man’s opinion.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
