Investor: Luckin Coffee Will Overtake Starbucks in China

    After accusations of fraud and going through bankruptcy, the rapidly growing coffee chain is witnessing a massive turnaround, according to one hedge fund manager. 

    Growth | November 9, 2022 | Ben Coley
     Street view of Chinese people leaving a Luckin Coffee shop in Wuhan China.

    istock/Julien Viry

    Luckin Coffee earned $107 million in net profit in 2021, its first time achieving annual profit.

    China-based Luckin Coffee is witnessing a "miracle" turnaround, nearly three years after an anonymous 89-page report initiated a major fraud saga. 

    The person who declared this comeback, ironically, is the same individual who made those allegations in early 2020. Hedge-fund manager Sean Ma runs Beijing-based Snow Lake Capital, which acquired a minority stake in the chain, according to the Wall Street Journal. He told the publication that he expects Luckin to now overtake Starbucks in China.

    Ma reportedly released a slide presentation and 81-page report making the case for this prediction, including the assertion that Luckin should be valued at $15 billion based on $390 million profit in 2024 and a multiple of 35 times earnings. 

    “I’m telling the world this is a good company. I have vetted it. I have done my homework,” Ma told the Wall Street Journal in an interview. 

    Luckin's controversy began January 2020 when short seller Muddy Waters received a report alleging numerous fraud claims, including inflation of revenue and profit. The document said when the coffee chain went public in May 2019 with its $645 million IPO, it was a "fundamentally broken business attempting to instill the culture of drinking coffee into Chinese consumers through cut-throat discounts and free giveaway coffee."

    After an audit raised questions, the brand began an internal investigation and found that its COO fabricated hundreds of millions of dollars over multiple financial quarters. The news cut more than $5 billion from its valuation, or 75 percent of the company's market value. An independent committee, which examined more than 550,000 documents and interviewed more than 60 witnesses, found that revenue was inflated by $302 million in 2019 and expenses were inflated by $191 million. 

    The company spiraled further from there. Luckin was delisted from Nasdaq and removed its COO, CEO, chairman, and several other employees, which didn't come without controversy. The SEC slapped the brand with an $180 million fine, and in early 2021, the company declared bankruptcy to restructure debt and negotiations with stakeholders. 

    The Wall Street Journal said Luckin emerged from bankruptcy in March and is now run by Chinese private equity firm Centurium Capital, which injected $240 million worth of capital in the spring of 2021. The brand notched $107 million in net profit in 2021—it's first time achieving annual profit—and shares have risen more than 80 percent in 2022, placing the company's valuation at $4.4 billion. 

    Luckin finished June with 7,195 shops, up from 4,803 at the end of 2020. Same-store sales grew 41.2 percent in its second quarter ending June 30, and net revenue increased 72.4 percent to $493.2 million. Store-level operating profit margin was 30.6 percent compared to 23.1 percent in 2021. In comparison, Starbuck's comps in China decreased 16 percent in the 13-week quarter ending October 2, driven by a 17 percent drop in transactions. Revenue was $775.6 million, down 20 percent from $964 million in the year-ago period. Starbucks had 6,021 stores at the start of October. 

    Starbucks blamed sales declines on COVID restrictions across the country. Ma said Luckin has weathered these obstacles with its grab-and-go focus. The hedge-fund manager noted in his report that Luckin is building sales with coffee-based beverages and coconut milk lattes. The growth plan is to enter smaller cities, while Starbucks remains in larger markets.