The Starbucks of China Just got Lucky

Edit: This was written on Thursday December 17th, 2020 and first published on the Last Futurist.

Today Luckin’s stock $LKNCY increased 96 percent after its settlement with the SEC is over (Edit: another 28% the day after). The company has agreed to pay a $180 million penalty to settle accounting fraud charges for “intentionally and materially” overstating its 2019 revenue and understating a net loss, U.S. regulators said on Wednesday.

While inflating your sales is bad, this is the Starbucks of China for a reason. Its stock reached $50 less than a year ago on January 17th, 2020. At the start of trading today it was $5.28. Clearly there’s room to grow especially with historically low interest rates, Fed buying of bonds and a double catalyst of a Moderna FDA approval and a stimulus package before Christmas. The Santa Rally is real and can be seen this week on stocks like $LKNCY and $MVIS, among others.

The company has agreed to pay the penalty, which may be offset by certain payments it makes to its security holders in connection with its provisional liquidation proceeding in the Cayman Islands. This does not mean Luckin’s fundamentals are that strong, but China is ahead in the recovery even though they still barely drink coffee.

In late June, Luckin’s stock was $1.38. Clearly this is a very volatile stock, with a lot of potential upside given the history of the chart.

Luckin could easily soar in 2021 back to at least the $12 or $14 level. Reaching a settlement with the SEC is a huge milestone for the beaten down stock.

You can be a disgraced Chinese coffee chain and still have a great future. Such is the illogical stock market of 2020. The transfer of funds to the security holders will be subject to approval by Chinese authorities.

In China you can fabricate $300 million in sales and still do alright. Founded in June 2017, Luckin had one of the most successful U.S. IPOs by a Chinese company last year, attracting interest from prominent U.S. investors, including long-only funds and hedge funds. What is rule of law compared to the greed of business? Coffee matters, I guess?

But Luckin said in early April that as much as 2.2 billion yuan ($310 million) in sales last year were fabricated by its Chief Operating Officer Jian Liu and other staff, who had been suspended while the company carried out its investigation.

Luckin Coffee will survive its fabricated sales scandal. In 2021 it will actually thrive, and you can bet on it. Ironically the penalty is about half of the amount it fabricated in sales. So does that mean if its stock was worth $40, it’s now worth about $20? That argument could be made. It did have a great app and a culture of delivery well before Covid-19 hit. The falsified numbers equate to about 40% of Luckin’s annual sales projected by analysts, according to Refinitiv IBES data. $50 minus 40% come to about 30 US dollars.

So should we be surprised the stock goes from $5.30 to $7.30 in one day? Not really, though the stock was quite volatile before we knew it had a real future.

The Xiamen-headquartered company, which delisted from Nasdaq at the end of June due to the accounting scandal, might just be too valuable for China to let fail. China needs its clones of western companies and it bailed out NIO, the Tesla of China, when it was looking like it might have gone bankrupt. The Chinese State protects its companies that can grow this fast, and Luckin is really lucky on this account.

What people don’t understand is how Luckin is actually a technology company. Look at how they describe themselves.

Luckin has pioneered a technology-driven retail network to provide coffee and other products of high quality, high affordability, and high convenience to customers. Empowered by big data analytics, AI, and proprietary technologies, the Company pursues its mission to be part of everyone’s everyday life, starting with coffee. 

Luckin raised more than $864 million from debt and equity investors, so it would have been embarrassing for the SEC had they completely stopped the stock. Due diligence of Chinese companies for the most part is not occurring, since China doesn’t let American auditors look at their books. Chinese stocks are therefore inherently much more risky and prone to fraudulent schemes.

Luckin’s stock was $26.20 on April 1st, before we knew about the scandal. A stock market bubble is the perfect time for Luckin’s name to be cleared. It doesn’t have to claw back in a normal market, it can boom back with the vengeance of a new wave of profiteering retail investors like you and me.

In a world where Apple’s stock can double, Tesla can become nearly a $1 Trillion stock overnight, can we give Luckin, too, some love? I mean, it’s an adorable name, maybe not as good as Snowflake, Lemonade or Coinbase, but it’s good. We can expect a fast and furious rally for $LK because the market likes sentimental stories. In a crazy year where just about everything crashed and then subsequently recovered, Luckin Coffee is a late bloomer, and if you are gold digging in China, you could pick worse stocks.

As of January 2020, it managed 4,507 stores and exceeded the number of Starbucks stores in China. As of April 2020, according to the store locators from Luckin’s app and Starbucks’ website, Luckin now has at least 2,000 more locations in China than Starbucks. Luckin’s growth story is realistically just getting started.

Luckin can still grow in one of the world’s fastest growing economies. Luckin’s stores are real and the company appears to have a lot of cash even despite the accounting issues. A higher stock will mean Luckin is back in business on all accounts. That’s what we have to assume the 96% gain we saw today is: just the beginning. But do your own due diligence if you don’t believe me. Luckin $LKNCY could be one of the best performing stocks of December 2020.

At the Last Futurist we often talk about the future of business and technology as it relates to the best stocks in various sectors.