After Major Rebrew, Is Luckin Seeking To Re-list In New York?

Key takeaways:

• Scandal-tainted Luckin Coffee is discussing capital raising options, including a potential re-listing on the Nasdaq later this year, according to a Financial Times report
• The company still faces hurdles in the form of competition from established giant Starbucks and newer up-and-comers like Manner Coffee

By Jony Ho

After getting burned once, will investors be willing to take another sip of a scandal-tainted Luckin Coffee Inc. that says it’s now new and improved?

Established in October 2017, the once-heady Luckin went public on the Nasdaq just 19 months later in May 2019. But it was forced from the market just 13 months after that following its admission to inflate its revenue to the tune of 2.2 billion yuan ($347 million). Now, growing signals are indicating China’s biggest coffee franchise may be weighing a second go at a U.S. listing.

The latest of those came in a report from the Financial Times last week, which said Luckin officials have been meeting with investors and business consultants to discuss issues including a plan to pursue an IPO again in New York to raise more money. The company filed for bankruptcy protection in the U.S. last year as part of a broader overhaul, and recent improvement in its performance may make it attractive to investors who suffered huge losses less than two years ago.

Company representatives have so far denied the speculation. But market chatter has circulated for a while about a potential comeback for a company that has posed a major challenge to market leader Starbucks SBUX in China. Fueled by that speculation, its over-the-counter (OTC) shares jumped 16% last Wednesday after the Financial Times report came out, only to fall back by 6.2% the next day after the company’s denial. But if the company really harbors secret ambitions to re-list, what are its chances of success, and what challenges will it face?

Sweeping reform

After getting kicked off the Nasdaq in June 2020, Luckin launched a sweeping reform that included replacing its chairman with company co-founder Guo Jinyi, and the exit of four board members.

In December 2020, the company reached a settlement with the U.S. securities regulator and paid a fine of $180 million. It filed for bankruptcy protection in the U.S. last year to give it breathing room to continue operating and restructure its debt with a plan approved by the U.S. court last month. With the bankruptcy reorganization now complete, the company is technically free to seek a U.S. listing again.

Luckin’s OTC shares, which trade under the symbol LKNCY, have been on a roll lately as the scandal moves further into the past. They closed Monday at $8.87, a big increase of nearly 10 times over its price of $0.98 when the then-disgraced company first entered the OTC market. Its current $2.25 billion market value also makes it one of the most valuable companies in the pink sheet market.

Analysts believe the company won’t face major regulatory hurdles if it tries to relist, since it has been submitting annual financial reports and regular financial statements since last year, including its first post-scandal quarterly report in last year’s third quarter.

We should note that Luckin has made progress in righting its ship by returning its focus to improvement of its underlying products and services. Last year, it rolled out a franchise approach with zero fees, allowing it to open more shops in smaller third- and fourth-tier cities around China. It also shut down over 1,000 struggling shops, markedly improving its finances.

That overhaul was on display in Luckin’s third-quarter financial report, which showed its revenue doubled to 2.35 billion yuan year-on-year, with product sales up 83.9% to 1.93 billion yuan. Its net loss also largely evaporated to just 23.5 million yuan, showing it might even be able to turn a profit soon.

Despite the big disruptions created by new Covid-19 outbreaks in China since last July, Luckin still had an average monthly customer base of 12.7 million people in the third quarter, up by a sizeable 79.2% year-on-year. Its store count also rose 17.4% to 5,671 over that time, passing Starbucks by about 10%, showing the company is bouncing back and regaining consumer confidence.

But even if a relisting is its end game, the market it now faces in China may be quite different from just three years ago.

One major change is the rise of new homegrown competition. Shanghai-based Manner Coffee has been gathering momentum by selling high-quality coffee from basic shops for just 10 yuan to 20 yuan per cup. That’s made the chain popular among young white-collar Chinese officer workers, who have dubbed it “street coffee” for its everyman touch.

Manner has chosen a steadier expansion model compared with Luckin’s more aggressive tack. Its store count increased from just eight at the end of 2018 to 194 last year, most of those in Shanghai, with the rest in first-tier cities like Beijing, Chengdu and Shenzhen where consumers have relatively deeper pockets.

Keeping costs low

Manner’s Shanghai shops are already profitable due to its effective cost-control strategies. Its Shanghai stores are now valued at $15 million each on average, 30 times the figure for Luckin. That’s helped Manner win favor not only with coffee drinkers, but also heavyweight investors like tech giants Meituan (3690.HK) and ByteDance. Markets sources disclosed the company was planning a $300 million Hong Kong IPO, though founder Han Yulong quickly dismissed those reports.

Thus a new-and-improved Luckin will face competition not only from Starbucks but also a newer challenge from homegrown competitors like Manner, regardless of the huge growth potential of China’s coffee market.

The company could also face challenges in the U.S., which adopted legislation compelling Chinese companies to abide by U.S. auditing rules and information disclosure requirements after the Luckin scandal.

Luckin ruffled U.S. congressional leaders of both parties with its scandal, and for that reason is likely to face intense scrutiny from the securities regulator even if it is able to meet re-listing requirements, said Francis Kwok, vice chairman of the Hong Kong Institute of Financial Analysts and Professional Commentators. He added the U.S.

Securities and Exchange Commission won’t easily give a green-light for Luckin to re-list, and will put the company’s financial statements under the microscopic should it make such an application.

As for a potential second listing in Hong Kong like other U.S.-listed Chinese stocks have done, Kwok said Luckin could face difficulty meeting Hong Kong’s profitability requirements since it comes from a traditional industry, unless it can add technology elements like big data to its business portfolio.

At the end of the day, an approach of slow and steady progress often wins the race. Accordingly, Luckin’s best option may be optimizing its business operations first before a new IPO attempt, showing the market that it is truly reformed and deserves to win back investor trust.