Hall of Shame

Consumer Discretionary

Luckin Coffee Inc. (LKNCY US)

Year: 2020

Luckin Coffee Inc. (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 managed around 4,507 stores (as of Jan. 2020).

It listed on the NASDAQ in May 2019 and raised US$645.15M. An additional share offering in September 2019 raised US$579.6M. Previous ticker (LK US)

Muddy Waters 
February 1, 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.

Citron Research
January 31, 2020 Another short-seller, Citron Research, disagreed with the report. Citron, also received the report, but said that all data from Biz Con China, App download, and calls with competitors confirmed the financials. It believed that Luckin Coffee business was on fire in China. Citron said it had respect for Muddy, but this anonymous report would fall short on accuracy.

February 3, 2020 Luckin Coffee responded to the anonymous report saying it contained misleading and false allegations.  

Ash Illuminations Research
February 4, 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 suggested that Luckin was misleading its investors by providing them wrong information and using fraudulent practices to hide the real picture.

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

April 2, 2020 Luckin Coffee announced the formation of an Independent Special Committee. It also reported that an on-going Internal Investigation found that Mr. Jian Liu, the chief operating officer and a director of the Company, and several employees reporting to him, had engaged in certain misconduct, including fabricating certain transactions.  It also stated that the fabricated transactions from the second quarter of 2019 to the fourth quarter of 2019 amounted to around RMB2.2 billion. Costs and expenses were also inflated during this period.   It stated that investors should no longer rely upon the Company’s previous financial statements and earning releases for 2019. The investigation was ongoing and the Company would continue to assess its previously published financials and other potential adjustments.

May 12, 2020 The Board terminated CEO, Jenny Zhiya Qian, and COO, Jian Liu.

June 29, 2020 The company was de-listed from the NASDAQ.

July 1, 2020 Luckin Coffee announces the substantial completion of the internal investigation. The internal probe found that, from April 2019, its 2019 net revenue was inflated by some 2.12 billion yuan (US$311 million) and costs & expenses were inflated by 1.34 billion yuan.  Evidence discovered showed that the Company’s former CEO, Jenny Zhiya Qian, former COO, Jian Liu and some employees reporting to them participated in the fabricated transactions and that the funds supporting the fabricated transactions were funnelled to the Company through a number of third parties associated with the Company employees and/or related parties. The Special Committee also recommended that Chairman, Charles Zhengyao Lu should resign based on documentary and other evidence identified in the Internal Investigation and its assessment of his degree of cooperation in the Internal Investigation.

July 2, 2020 At a board meeting the resolution to remove the chairman was rejected.

July 5, 2020 At an EGM, the chairman, Lu, executive directors David Hui Li, Erhai Liu and independent director Sean Shao were voted off the board.

September 2, 2020 At another EGM, Sean Shao was re-appointed as an Independent director.

September 22, 2020 The Chinese State Administration for Market Regulation fined two Luckin entities and 43 other companies that helped it falsify sales and expenses, a combined 61 million yuan (US$8.98M).


Muddy Waters: Anonymous Report - Luckin Coffee: Fraud + Fundamentally Broken Business, 1 Feb 2020
Luckin Coffee Inc.:  Response to Anonymous Report, 3  Feb 2020

Ash Illuminations Research: Luckin involved In Serious Financial & Business Fraud, 4 Feb 2020
J-Capital Research: The Long and Short of It, 12 Feb 2020
Luckin Coffee Inc.: Formation of Independent Special Committee and Ongoing Internal Investigation, 2 Apr 2020
Nikkei Asian Review:  China’s Luckin Coffee faked $310m in sales, in-house probe finds3 Apr 2020
WSJ: Behind the Fall of China's Luckin Coffee: a Network of Fake Buyers and a Fictitious Employee, 28 May 2020
Luckin Coffee Inc: Announces the Substantial Completion of the Internal Investigation, 1 Jul 2020
Nikkei Asia: China fines Luckin Coffee and linked firms a total of $9m, 22 Sep 2020
Luckin Coffee Inc.:  Third Quarter 2019 Earnings to Sept. 30 2019,
Luckin Coffee Inc.:  Prospectus - Additional Share Offer, Jan 2020
Luckin Coffee Inc.:  Prospectus - IPO, Apr 2019


 


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