Luckin Coffee DD

**EDIT: 6 hours after my post, Luckin coffee filed with the court to close the chapter 15 case. They also revealed the the joint provisional liquidators were discharged on 3 March. Link to filing here. Finally, the filing says Luckin will exit chapter 15 on 7 April. This is not yet being reported by a single news outlet. Thesis: a significantly mis-priced stock because contrary to popular belief, the Luckin Coffee of 2022 is not the same company as the LK of 2020, and almost nobody knows it. It is a much better company, profitable, and well positioned to be talked about as one of the greatest turnarounds ever for a company. BLUF: Luckin Coffee is poised to announce that the joint provisional liquidators appointed by the Cayman court will be discharged, and an exit from Chapter 15 will occur soon after, with common shares intact. I know because it is plainly stated in this court filing. Nobody is talking about this. Edit: I fixed the link We all know the Luckin Coffee of 2020, the Muddy Waters report, the subsequent crash and delisting, but almost no information has been out in the mainstream that has provided investors with a clear picture of the company's turnaround. In fact, Google trends shows that searches for "Luckin Coffee" have never been lower, despite a clear turnaround in their business model and improved profitability. Most of what you read on yahoo and other blogs is wrong. Most articles have negative spin and report false numbers. I believe these are perpetuated by investors with significant bias due to being invested in Starbucks or shorting China in general. The majority of the information I have researched has come from the NY bankruptcy court filings, available here, the Cayman Island court documents searchable here. exit: fixed links If you didn't know, Luckin trades as an American Depositary Receipt (ADR), and is a Variable Interest Entity (VIE) registered in the Cayman Islands. That itself carries a bit of risk if you think that the U.S. government will delist these companies in three years. In July 2020, Luckin entered into what was called joint provisional liquidation. Unlike the name suggests, it was not due to an inability to pay its bills, but rather because the proceeds from the capital raise several months earlier could be considered proceeds of a crime - thus they weren't sure if they could use their ~800 million on hand to pay creditors. The Cayman court appointed two lawyers as JPLs who were in charge of approving every single large transaction as well as overseeing the turnaround for the past two years. They filed for chapter 15 Bankruptcy last year, but again, this was not a traditional bankruptcy and only served to make sure that any settlements reached in the Cayman Islands could be enforced in the US. Many people sold out on this announcement because they didn't understand this fact. Positive developments over the past two years: - In the last two years, Luckin Coffee drastically changed their business model. They closed unprofitable stores and started a new franchising model, they are the only chain coffee shop that also operates in tier 3-4 cities. - Everyone connected to the fraud is gone. The CEO does not own any more shares, as they were seized by banks to satisfy a margin loan, and subsequently sold to the leading equity investor, Centurium capital. - They settled with the SEC without admitting wrongdoing. - Their latest quarterly earnings (Q3 2021) has a $0.01 loss per share, with revenue growing 106% yoy. - They successfully raised 250 million more last year in order to pay these settlement fees. They settled with their bondholders, which was subsequently approved by the Cayman court. - They settled the class action lawsuit from shareholders for pennies on the dollar, which was also approved by the cayman court and preliminarily approved by the NY district court (in fact many have perhaps received notice of this settlement). - They are back to regular financial reporting. - Common shares intact after restructuring - 700 million in cash on hand - More stores than Starbucks in China - Valued 8 times less on a per store basis than Manner coffee, another Chinese coffee startup. - Market cap is only 3x price to sales for 2021 Edit: 2020 audited financials here Q3 2021 financials here Risks - Everybody hates Luckin. This for me is the biggest risk. Will they be able to gain investors' trust again? Those who have been burned may never give the company another chance, our of principle. I completely understand, but I think it should be understood that the company is an entirely different company with a different management team now. - Chinese VIE (geopolitical risk) - Take private. Centurium capital controls about 60% of the vote, so it's conceivable that they may make a play to take private with only a 20% premium, and relist in China at a substantial markup. However, the Poison pill adopted by the company last year makes this unlikely unless collusion by the board. Conclusion This is not financial advice. I am a shareholder and I am long (edit: position here). I truly believe that this is the most undervalued consumer stock that still has a lot of room to grow in a Chinese market serving a billion people in a coffee market that is expected to boom. Credit: https://www.reddit.com/user/mogenV64/ 

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Luckin Coffee DD

bullish

**EDIT: 6 hours after my post, Luckin coffee filed with the court to close the chapter 15 case. They also revealed the the joint provisional liquidators were discharged on 3 March. Link to filing here. Finally, the filing says Luckin will exit chapter 15 on 7 April. This is not yet being reported by a single news outlet.

Thesis: a significantly mis-priced stock because contrary to popular belief, the Luckin Coffee of 2022 is not the same company as the LK of 2020, and almost nobody knows it. It is a much better company, profitable, and well positioned to be talked about as one of the greatest turnarounds ever for a company.

BLUF: Luckin Coffee is poised to announce that the joint provisional liquidators appointed by the Cayman court will be discharged, and an exit from Chapter 15 will occur soon after, with common shares intact. I know because it is plainly stated in this court filing. Nobody is talking about this. Edit: I fixed the link

We all know the Luckin Coffee of 2020, the Muddy Waters report, the subsequent crash and delisting, but almost no information has been out in the mainstream that has provided investors with a clear picture of the company's turnaround. In fact, Google trends shows that searches for "Luckin Coffee" have never been lower, despite a clear turnaround in their business model and improved profitability. Most of what you read on yahoo and other blogs is wrong. Most articles have negative spin and report false numbers. I believe these are perpetuated by investors with significant bias due to being invested in Starbucks or shorting China in general.

The majority of the information I have researched has come from the NY bankruptcy court filings, available here, the Cayman Island court documents searchable here. exit: fixed links

If you didn't know, Luckin trades as an American Depositary Receipt (ADR), and is a Variable Interest Entity (VIE) registered in the Cayman Islands. That itself carries a bit of risk if you think that the U.S. government will delist these companies in three years. In July 2020, Luckin entered into what was called joint provisional liquidation. Unlike the name suggests, it was not due to an inability to pay its bills, but rather because the proceeds from the capital raise several months earlier could be considered proceeds of a crime - thus they weren't sure if they could use their ~800 million on hand to pay creditors. The Cayman court appointed two lawyers as JPLs who were in charge of approving every single large transaction as well as overseeing the turnaround for the past two years. They filed for chapter 15 Bankruptcy last year, but again, this was not a traditional bankruptcy and only served to make sure that any settlements reached in the Cayman Islands could be enforced in the US. Many people sold out on this announcement because they didn't understand this fact.

Positive developments over the past two years:

- In the last two years, Luckin Coffee drastically changed their business model. They closed unprofitable stores and started a new franchising model, they are the only chain coffee shop that also operates in tier 3-4 cities.

- Everyone connected to the fraud is gone. The CEO does not own any more shares, as they were seized by banks to satisfy a margin loan, and subsequently sold to the leading equity investor, Centurium capital.

- They settled with the SEC without admitting wrongdoing.

- Their latest quarterly earnings (Q3 2021) has a $0.01 loss per share, with revenue growing 106% yoy.

- They successfully raised 250 million more last year in order to pay these settlement fees. They settled with their bondholders, which was subsequently approved by the Cayman court.

- They settled the class action lawsuit from shareholders for pennies on the dollar, which was also approved by the cayman court and preliminarily approved by the NY district court (in fact many have perhaps received notice of this settlement).

- They are back to regular financial reporting.

- Common shares intact after restructuring

- 700 million in cash on hand

- More stores than Starbucks in China

- Valued 8 times less on a per store basis than Manner coffee, another Chinese coffee startup.

- Market cap is only 3x price to sales for 2021

Edit: 2020 audited financials here

Q3 2021 financials here

Risks

- Everybody hates Luckin. This for me is the biggest risk. Will they be able to gain investors' trust again? Those who have been burned may never give the company another chance, our of principle. I completely understand, but I think it should be understood that the company is an entirely different company with a different management team now.

- Chinese VIE (geopolitical risk)

- Take private. Centurium capital controls about 60% of the vote, so it's conceivable that they may make a play to take private with only a 20% premium, and relist in China at a substantial markup. However, the Poison pill adopted by the company last year makes this unlikely unless collusion by the board.

Conclusion

This is not financial advice. I am a shareholder and I am long (edit: position here). I truly believe that this is the most undervalued consumer stock that still has a lot of room to grow in a Chinese market serving a billion people in a coffee market that is expected to boom.

Credit: https://www.reddit.com/user/mogenV64/

read-time
4 min
13.75
Target Price
8/ 10
Confidence
1-2 Months
Timeframe
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