GIC-backed PRC coffee chain filed for Chapter 15 bankruptcy in New York

News emerged yesterday (5 Feb) that embattled Chinese coffee chain Luckin Coffee has filed for Chapter 15 bankruptcy in New York, less than a year after the company said that more than a quarter’s worth of business may have been faked.

The move is designed to protect the company from lawsuits by U.S. creditors, including bondholders owed $460 million and shareholders.

In U.S. court documents, Luckin Coffee asked the federal court to allow the company to restructure its finances through a court case filed in the Cayman Islands, where the company is incorporated. That proceeding is already underway and is focused on negotiating a settlement with shareholders and bondholders, according to court documents.

Once thought of as a challenger to Starbucks’ dominance in China, Luckin Coffee fired its chairman and chief executive officer as well as the chief operating officer after news emerged that the company had faked its sales reports. It paid hundreds of millions of dollars in fines to both Chinese and U.S. regulators, and saw its stock plunge 90% before being delisted by Nasdaq.

The U.S. Securities and Exchange Commission (SEC) fined the company US$180 million in December after finding that it intentionally fabricated more than US$300 million in sales from April 2019 through January 2020.

Luckin’s alleged malfeasance, which involved misstating its revenue, expenses and operating loss, was all done to give investors the false impression that the company was experiencing miraculous growth, the SEC said.

GIC invested in Luckin Coffee

In 2018, Luckin Coffee 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.

And in 2019, the loss-making coffee chain filed for a US initial public offering (IPO) on Nasdaq (‘Share price of GIC-backed PRC coffee chain plunges 75.5% after investigation finds COO fabricated sales‘, 3 Apr 2020).

Since its inception in June 2017, Luckin quickly expanded its chain to thousands of stores in China, with backing from investors including GIC and others. It spent millions of dollars a year opening outlets, trying to unseat Starbucks in China.

Many customers were initially attracted to Luckin coffee chain by its free vouchers. Despite reporting a net loss of US$241.3 million for 2018, it was able to clinch an IPO on Nasdaq a year later.

Last Apr, when news emerged that a special committee of three independent directors would investigate the “misconduct, including fabricating certain transactions” that spanned 3 quarters of 2019, involving RMB2.2 billion (US$310.1 million), Luckin’s share price dived.

COO Jian Liu was immediately suspended along with other staff implicated in the misconduct. Liu was accused of making up transactions and inflating expenses during the April-December period in 2019.

The investigation was actually triggered by a report from California-based Muddy Waters Research. Muddy Waters sounded alarms last Jan by publishing a report accusing 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.

Muddy Waters founder Carson Block commented, “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.”

Indeed, the chain’s collapse has led to renewed scrutiny of Chinese companies that sell shares on U.S. exchanges without adhering to rules that require their audits be inspected by American regulators. The fallout also triggered fresh concerns for global investors about China’s corporate governance.

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