Share price of GIC-backed PRC coffee chain plunges 75.5% after investigation finds COO fabricated sales

In 2018, China-based Luckin Coffee, a coffee chain with ambitions to challenge Starbucks, raised US$200 million from investors including Singapore sovereign wealth fund GIC and China International Capital Corp.
It was reported that the valuation of the company was about US$1.5 to US$2 billion at the time. Last year, the loss-making company filed for a US initial public offering (IPO) on Nasdaq.
Since its inception in June 2017, Luckin has quickly expanded into some 4000 stores in China, with backing from investors including GIC and others. It is spending millions of dollars a year opening outlets, trying to unseat Starbucks in China. But Starbucks has also been expanding at break-neck speed, opening a new store roughly every 15 hours.
Many customers are initially attracted to Luckin coffee chain by its free vouchers. But chasing after the entrenched Starbucks has proven to be costly to Luckin. It has been reported that Luckin is burning through US$130 million a year and would continue to see losses. The company reported a net loss of US$241.3 million for 2018, on total revenue of US$125.3 million.
COO caught fabricating sales
Luckin’s share price  has plunged some 75.5% after news emerged yesterday that a special committee of three independent directors would be formed to investigate “misconduct, including fabricating certain transactions” that spanned 3 quarters (2nd to 4th Qtr) of 2019 and involves RMB2.2 billion (about US$310.1 million).

Jian Liu, chief operating officer (COO) at Luckin Coffee and a director of the company, has been suspended along with other staff implicated in the misconduct. And the company has suspended or terminated contracts and deals with parties involved. Liu has been accused of making up transactions and inflating expenses during the April-December period of last year.
The company said it is still examining the financial impact. “As a result, investors should no longer rely upon the Company’s previous financial statements and earning releases for the nine months ended September 30, 2019 and the two quarters starting April 1, 2019 and ended September 30, 2019, including the prior guidance on net revenues from products for the fourth quarter of 2019, and other communications relating to these consolidated financial statements,” Luckin said in a statement.
The fabricated sales unearthed by the internal probe are equivalent to more than 40% of Luckin’s 2019 revenue, based on the company’s reports and guidance. Luckin shares closed at just US$6.40 yesterday. The company’s market cap shrank to US$1.6 billion from its hey days of US$6.6 billion.
GIC is said to be holding over 5% of the company’s Class A Ordinary shares as of end of Feb this year, according to a regulatory filing. A person familiar with the matter said GIC had “substantially reduced” its stake in Luckin prior to yesterday’s catastrophic event.
Class action lawsuit filed against Luckin
Luckin’s revelation yesterday followed a class action lawsuit filed in February against the company. On Nov 13, Luckin reported financials for the 3Q of 2019, saying it hit the milestone of breaking even at the store level. Shares then surged more than 70% through the end of January – even trading above $50 at one point – compared with the $18.89 market close Nov 12.
California-based Muddy Waters Research sounded alarms in Jan publishing an anonymous 89-page report that accused the Chinese coffee company of being a “fraud”. The report, which cited “smoking gun evidence” including 11,260 hours of traffic videos, alleged that Luckin exaggerated daily items per store by more than half during the second half of 2019.
“This is again a wake-up call for U.S. policymakers, regulators, and investors about the extreme fraud risk China-based companies pose to our (US) markets,” noted Muddy Waters founder Carson Block.
“This is an old story that’s now coming to the forefront – that is, the credibility of Chinese companies,” Drew Bernstein, co-regional managing partner of Marcum Bernstein & Pinchuk, a New York-based firm specialized in auditing China-based companies told reporters. Chinese companies need to demonstrate they are worthy of investor trust and confidence, he said, “and this was a hit on that confidence level.”
In any case, on its website, GIC explained that it manages the proceeds from the Special Singapore Government Securities (SSGS) that are issued by the Singapore Government, which the CPF Board has invested in with the CPF monies. “So while the CPF monies are not directly transferred to GIC for management, one of the sources of funds for the Government’s assets managed by GIC is the proceeds from SSGS,” GIC said.