Luckin Coffee (OTCMKTS:LKNCY) was once touted as the Starbucks (NASADAQ:SBUX) of China. Having plunged by 83% in the last one year, Luckin Coffee stock is nothing but a fallen angel.
If I had to invest in a consumption theme, there are dozens of better options.
Starbucks would give me a dividend yield of 1.8% and SBUX stock has trended higher by 16.5% in the last one year.
If I am looking at short-term trading, I would rather look at some of the hot stocks. As an example, Inovio Pharmaceuticals (NASDAQ:INO) stock has been volatile. With the company in the race for the vaccine against Covid-19, the stock will continue to see plenty of action.
For Luckin Coffee, everything is still to murky. And I don’t see much hope.
The company has not filed earnings report since the third quarter of 2019. Luckin Coffee stock is already de-listed from the NASDAQ. Forget about results, I don’t see the company’s website updated for any new business developments or product launch since FY2019.
Business as Usual for Luckin Coffee?
The company has not provided any updates on business developments in the last few quarters.
However, in August 2020, a new report claimed that Luckin Coffee has achieved overall break-even in July 2020. The report also claims that the company is expected to achieve profitability in the coming year.
In addition, it was reported that the “new management has come on board and defined a new strategic plan for the company, which includes rapid expansion to capture markets.”
I don’t see this as credible. If there was a business transformation plan, the company would have come-up with a filing. Since July 2020, the company nine 6K filings. None of the filing talks about any business development.
It was in the interest of the new management to share any positive news. No news is bad news, in this case.
Light Touch Liquidation
In July 2020, it was reported that Luckin Coffee has “appointed Alvarez & Marsal as its provisional liquidator.” Light Touch liquidation would imply that the restructuring would have no material impact on the company’s operations.
I have the following concerns –
It’s nearly four months since the appointment and there is no update on the restructuring. The light touch liquidation plan came only after “a creditor of the company filed a winding-up petition against the company.”
The company hired financial advisors to negotiate with creditors. One of the key points to note is that the coffee chain claims that it has $780 million in cash and equivalents. Further, the company had $223 million in liabilities.
However, these numbers remain un-audited. If the company has little or no cash, a potential scenario is winding-up of business operations.
To underscore my point, the State Administration for Market Regulation imposed a fine of 61 million yuan on the company for inflating performance indicators. The company’s last balance sheet is therefore not worth believing.
Given this view, I doubt if light touch liquidation will work. The delay in the restructuring raises suspicion and it’s best to steer clear of Luckin Coffee stock.
Concluding Views on Luckin Coffee Stock
In the last decade, China’s coffee consumption has grown at a CAGR of 16%. In the current year, the market size is expected at $42.3 billion. There is no doubt on the market potential.
However, I would rather invest in Starbucks than consider investing in Luckin Coffee. The former is planning to build a coffee innovation park in eastern China. This will be Starbucks’s biggest investment outside the United States.
For Luckin Coffee, growth and expansion is far away. The coming quarters will be consumed in restructuring. In the worst-case scenario, the business might wind-up.
Therefore, I would avoid Luckin Coffee stock. Another bad news would send the stock plunging. Even from current levels.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
