Hall of Shame

Consumer Discretionary

Luckin Coffee (LK US)

Year: 2020

Luckin Coffee (Chinese: 瑞幸咖啡) is a coffee chain in China.  The company was founded in Beijing in October 2017.   Most of its stores are small "pick-up" stores that locate in office buildings or college campuses that serve for online orders' pickup and delivery. It manages around 4,507 (Jan. 2020) stores.

It listed on the NASDAQ in May 2019 and raised US645.15M.   An additional share offering in September 2019 raised 579.6M.

January 31, 2020 - Muddy Waters said it decided to bet that the stock will fall after receiving an 89-page anonymous report that accused Luckin of fraud.  The report titled "Luckin Coffee: Fraud + Fundamentally Broken Business" separately demonstrates how Luckin faked its numbers and why its business model is inherently flawed.  Covering these two areas it believed that :

  1. The company is inflating its number of items sold per store and cooking the book by moving the operating losses into advertising expenses, in order to achieve the so-called "store-level" profitability.
  2. The business model of the company is not sustainable and will fail eventually. Plus, company management has a bad reputation on the capital market and has already started to cash out through pledging shares.

January 31, 2019 - Another short-seller, Citron Research, disagreed with the report.  Citron also received the report but said that all data from Biz Con China and App download and calls with competitors confirm financials. Luckin Coffee business is on fire in China. Citron said it has respect for Muddy, but this anonymous report will fall short on accuracy. 

February 3, 2020 - Luckin Coffee responds to the anonymous report saying it contains misleading and false allegations.  

February 5, 2020 -  Ash Illuminations Research, another short-seller, tweeted "LUCKIN COFFEE Was Involved In Serious Financial & Business Fraud! $LK inflated its Pre-Made Food and Beverage Items sold by at least 3.17 times, 2.11 times, 3.06 times, 3.38 times for 2018Q4~2019Q3, respectively.  It released a 66 page report on Luckin Coffee.  The report suggests that Luckin is misleading its investors by providing them wrong information and using fraudulent practices to hide the real picture.

February 12, 2020 - J-Capital Research, aslo a short-seller, issued a note, "The Long and Short of It" on Luckin Coffee, agreeing with the anonymous report's conclusions.  It also noted that an Audit Committee member dumped shares, and the chairman's sister appears to be about to sell.

Muddy Waters:  Anonymous Report - Luckin Coffee: Fraud + Fundamentally Broken Business - Jan. 31, 2020
Luckin Coffee Inc.:  Response to Anonymous Report   - Feb. 3, 2020

Ash Illuminations Research: Luckin involved In Serious Financial & Business Fraud   - Feb. 5, 2020
J-Capital Research: The Long and Short of It   - Feb. 12, 2020

Luckin Coffee Inc.:  Third Quarter 2019 Earnings to Sept. 30, 2019
Luckin Coffee Inc.:  Prospectus - Additional Share Offer,  January 2020
Luckin Coffee Inc.:  Prospectus - IPO ,  April 2019