If you want a pivot to cyclicals and value to work out in China, Luckin is becoming a decent pick even without data. Luckin likely has over 4,000 locations. Its stock is now at $7. With a recent $250 million investment, Luckin will prove in the next 18 months just how serious it is at putting its shady past behind it.
At the Last Futurist, we think $LKNCY is a buy below $6.50. Before its accounting scandal, it had reached a high of $50. The TAM of Coffee chains will keep rising in China in the 2020s and Luckin’s global push could still be emergent.
Xiamen-based Luckin had positioned itself as an ambitious home-grown challenger to U.S. coffee giant Starbucks Corp. For all intents and purposes, their app has always been a digital transformation leader with a better delivery culture.
“Luckin Coffee plans to use the proceeds of the investment to facilitate the company’s proposed offshore restructuring and fulfill its obligations under its recently announced settlement with the U.S. Securities and Exchange Commission,” the company said in the announcement.
It will take time for Luckin to fully move on from its poor leadership and fraudulent corporate behavior. But it’s only a matter of time, since China needs more global corporations able to dominate in their respective sectors. The ‘Starbucks of China’ is not dead.
The company, which was fined $180 million by the U.S. Securities and Exchange Commission, said in February it was seeking protection under Chapter 15 of the U.S. Bankruptcy Code to facilitate the restructuring of its debt. As a result of this massive scandal, the SEC delisted Luckin from the Nasdaq.
But what happens when it’s re-listed? A move to $15 seems a realistic expectation. So if you bought today, you’d be buying at half the price of what you could make in 2022.
Luckin will also work with Centurion to file annual reports for the years ending Dec. 31, 2019 and Dec. 31, 2020. “as soon as possible.” The lack of data on Luckin is very concerning for cautious investors, but the value of the business remains intact. Better auditing will improve Luckin’s credibility to global investors in the second half of 2021.
While many doubt the business model of Luckin in terms of ever being profitable, scale in this business is what is key and Luckin has proven it knows how to scale. Investors are largely fed up with the company after the scandal, but opportunistic investors will see the real picture: that China needs Luckin to succeed and China won’t be denied if a corporation helps its global branding and reputation. In April, 2020 there were 6,500 locations in China alone apparently, if we can believe the data.
When a stock is languishing and the stock has plummeted and there is no news, that is the time to enter a position. The uncertainty spooks many investors and the volatility of its recent history is also promising even for traders. LKCNY is down more than 80% from its high, so a lot of the uncertainty is priced in. Had the management of Luckin been honest, Luckin would already have turned a corner in its growth in the recovery from the pandemic
Plenty of Chinese companies won’t be honest, and real auditing of their books doesn’t occur in the U.S. Investors know what they are dealing with, but the sheer scale of Luckin’s real business cannot be denied.
Since 2017, China’s coffee consumption has slowly been going up. Luckin Coffee filed for Chapter 15 bankruptcy in February this year. This meant the stock went from $12 to $7 today. If you believe the company can survive, you have to see it as a value play. Even if its P/E and price to sales aspects are not known, you have to simulate from the old data minus the fraudulent activity.
The fact that investors don’t trust Luckin and its bankruptcy restructuring process means Luckin’s stock could go down significantly, further ending up as an epic buying opportunity. Remember $NIO went under $2, and is today a $36 stock.
China’s corporations that clone Western brands will be protected at all costs, they amount to state-sponsored firms. It’s on this thesis that we believe Luckin is a smart investment. Luckin amounts to a synthetic value play, at a time of max uncertainty. That’s not just a good trade, that’s shaping up to be a decent long-term investment.
Luckin is a great buy, if you can tolerate the risk. This is not financial advice, just meant for entertainment purposes. Always do your own due diligence, but in this case the data does not exist. Only investors with an understanding of China are advised to invest in this risky stock. Bankrupt OTC stocks twinkle away every day. However at the Last Futurist, we don’t feel Luckin is at a high risk of going away in May — or anytime soon for that matter.