February 5, 2020 / 10:46 AM / 24 days ago

Breakingviews - China fortune hard to read in Luckin Coffee beans

FILE PHOTO: A cup of 'Luckin Coffee,' coffee is poured during the company's IPO at the Nasdaq Market site in New York, U.S., May 17, 2019. REUTERS/Brendan McDermid -/File Photo

HONG KONG (Reuters Breakingviews) - Luckin Coffee has become the latest poster child for wildly divergent opinions about China. Renowned short-seller Muddy Waters recently targeted the $9 billion Starbucks wannabe before frequent mainland sceptic Citron Research jumped in to defend it. In the battle over U.S. exuberance for, and suspicion of, mainland consumer tech, the overall verdict for now remains curiously optimistic.

After its initial public offering last May, Luckin shares bumped along for a while before going on a tear. Having debuted at $17, the price reached as high as $50 just a couple weeks ago. Soon after, Muddy Waters tweeted a link to an anonymous research report questioning the company’s sales figures, briefly erasing more than a quarter of its market value. The company denied the allegations and Andrew Left of Citron, who was once sanctioned by Hong Kong regulators for an attack on a Chinese property developer, talked his own book and said the price could double.

Some 30% of Luckin’s available shares are now being shorted, according to research outfit S3 Partners, evidence of how founder Qian Zhiya has managed to provoke both elation and pessimism. Her fast-growing chain is delivering cheap cups of joe with an app. It’s hardly a world-changing idea.

What’s more, Luckin locations don’t compare to those of its big Seattle-based rival, yet Qian successfully positioned her outfit as a competitor able to capture a whole new generation of new coffee drinkers. Heavy subsidies combined with breakneck expansion kept the company in the red; the net loss increased to $75 million in the third quarter of 2019.

Even before the Chinese virus outbreak, slowing growth was causing domestic companies to lay off workers. Venture capitalists are getting more cautious, too. Luckin’s surprise 12.5% rise in store-level profit margin in the latest quarter landed at a good time to reassure investors. Reported customer traffic, as the company measures it, also grew nearly 400% from a year earlier.

Big rallies by money-losing companies touting unusual business models naturally attract sceptics. Yet the attack from Muddy Waters didn’t stick. Luckin’s enterprise value clocks in at over 17 times sales; Starbucks trades at 4 times. As with much java, sometimes there’s no accounting for taste. 


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