Last Friday (15 May), the New York’s NASDAQ exchange sent notice to China-based Luckin Coffee that it will proceed to delist the company’s securities from its exchange. The loss-making company was publicly listed only for about a year, in May last year (‘Luckin Coffee’s founder says sorry as Nasdaq prepares to kick out his stock for fraud, in the first expulsion of a Chinese company‘, 19 May).
The impending delisting of Luckin Coffee came after the company disclosed last month (2 Apr) that a US$310 million accounting fraud was uncovered inside the company. At the same time, Luckin announced that it had suspended COO Liu Jian for alleged misconduct. The company’s turnover was inflated by about 2.2 billion yuan (US$310 million) between the second and fourth quarters of last year, and certain costs and expenses were “substantially inflated” through fabricated transactions.
Luckin’s stock price immediately plunged 76% to USD6.40 on the day of the fraud disclosure (2 Apr), from the previous day closing of USD26.20. In the next few days, its stock price continued to drop until it reached USD4.39 on 6 Apr before NASDAQ suspended the company’s share trading.
Last Wed (13 May), COO Liu and CEO Jenny Qian were fired from the company, while six other employees involved in or had knowledge of the alleged fraud were placed on suspension or leave.
Luckin was heavily backed by institutional investors like Singapore’s GIC, and the Qatar Investment Authority.
Shares of the company resumed trading on Wed (20 May). In its news article, SCMP noted, “Shareholders, including Singapore’s GIC, and the Qatar Investment Authority – according to exchange filings at the end of February – are almost certainly to rush for the exit when trading resumes, as Luckin Coffee faces expulsion (from NASDAQ) pending the outcome of its appeal.”
Since the resumption of trading, Luckin’s stock price continued to drop in the last 2 days: USD2.82 (20 May), USD2.01 (21 May).
NASDAQ has also introduced new rules to make it more difficult for some Chinese firms to float on the exchange. They include tougher accounting rules and a requirement that an IPO raises at least US$25 million.
Luckin Coffee – a Starbucks wannabe
According to a report from Reuters, Luckin Coffee started selling coffee drinks in Jan 2018. Some 6 months later, Luckin was able to raise US$200 million in its maiden fundraising round which valued the startup at US$1 billion. Investors included Singapore’s GIC.
By Nov 2018, Luckin raised another US$200 million which increased the company’s valuation to US$2.2 billion. GIC also participated in this second round of financing.
Luckin Coffee’s goal was to challenge Starbucks. It spent millions of dollars a year opening new 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.
To increase its customer base, Luckin would offer free vouchers to customers. But chasing after the entrenched Starbucks has proven to be costly to Luckin. It was 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 (‘Share price of GIC-backed PRC coffee chain plunges 75.5% after investigation finds COO fabricated sales’).
It’s not known how many shares GIC has sold and got out of Luckin but according to a regulatory filing, as at 28 Feb this year, GIC has 42,572,128 shares (5.4%) of the company. Luckin is now valued at about $0.5 billion as of yesterday’s close (21 May).
On its website, GIC explained that it manages the proceeds from the bonds – 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.
Muddy Waters exposes Luckin’s fraud
California-based Muddy Waters Research which used to cross swords with Temasek over Olam a few years ago, sounded alarms over Luckin in Jan this year. It published an anonymous 89-page report that accused Luckin 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.
Luckin at first denied the evidence. Then a couple of months later, it disclosed that its COO together with the other members of senior management of the company were fabricating fictitious transactions to inflate revenue.
Muddy Waters founder Carson Block told the media, “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.”