Today, embattled Chinese coffee chain Luckin Coffee (OTCMKTS:LKNCY) is seeing an impressive turnaround. Indeed, shareholders in LKNCY stock have seen gains of more than 25% at the time of writing. This move follows otherwise bullish momentum for this stock since the company’s rapid decline in 2020.
A company hit by accounting concerns, Luckin Coffee has become the poster child for the lack of oversight in the Chinese market. Many foreign investors simply don’t trust the regulatory standards abroad. And in the wake of Luckin’s scandal, some in the United States have used the company as justification for increased regulations.
Indeed, President Joe Biden’s recent support of a President Donald Trump-era piece of legislation aimed at delisting Chinese stocks that don’t meet American auditing standards came, in part, due to scandals such as the Luckin Coffee fiasco. This key headwind has been a reason for rather weak demand for Chinese stocks overall.
However, today it appears the tides are turning. Let’s discuss why LKNCY stock is on the move today.
LKNCY Stock Jumps on Restatement of Financials
Luckin Coffee announced today its restated financial statements for the second, third and fourth quarters of 2019. These restatements showed what appeared to be less impact than investors were expecting.
Luckin Coffee’s issues came to light in March 2020. The company’s Board of Directors became concerned with various aspects of its financial filings. In particular, concerns over fabricated transactions moved into the spotlight.
Indeed, fabricated transitions aren’t good. However, uncertainty with respect to how widespread these issues were had driven this stock down tremendously.
Today, the company announced these fabricated transactions effectively increased Luckin’s 2019 revenue in by 2.1 billion yuan (or $328 million), while its expenses were inflated by 1.34 billion yuan (or $208 million). In other words, gross margin of roughly $120 million has been removed from the company’s books.
For a company with a market capitalization of nearly $3 billion, this restatement appears to have been much less of an issue than previously expected. Accordingly, investors appear to be satisfied with the internal investigation carried out by the company and the corresponding results.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.