From Exposing Fraud To Buying A Minority Stake: Luckin Coffee's Unlikely Comeback

If you’ve been investing for more than a few years, you likely remember the rise of what-was-supposed-to-be China’s Starbucks Corporation SBUX competitor Luckin Coffee Inc LKNCY back in 2017.

Now, the same hedge fund manager that exposed the Chinese company’s shady accounting practices, which subsequently got its stock delisted from the Nasdaq in 2020, is actually backing the coffee chain.

It's “a miracle in China’s business history,” he said.

See Also: Luckin CEO Out Due To Fabricated Transactions

What Happened: Sean Ma, founder and manager of Beijing-based hedge fund Snow Lake Capital, anonymously penned a report back in 2020 exposing fraud at Luckin.

Since then, Ma has changed his tune, telling the Wall Street Journal that his fund purchased a minority stake in the Chinese coffee chain, predicting that the company’s valuation is going to surge.

“I never would have thought the company could come back. Many nearly impossible things happened,” Ma said.

Brief History: When Luckin debuted on the Nasdaq in May 2019, analysts predicted it would outperform the rest of the market by satisfying Chinese consumers' desire for an alternative to Starbucks.

Months after its debut, in January, an email started showing up in the inboxes of several traders and companies that specialize in short-selling, days after the stock price reached a record high (about $50), valuing the company at $12 billion.

Enter Ma’s Snow Lake Capital, enter Muddy Waters.

The report, which was later identified as coming from Snow Lake Capital and published by Muddy Waters, proved that some of its former executives and employees fabricated more than $300 million in sales, with the company confirming that as much as $310 million of its 2019 sales were fabricated.

The company agreed to Nasdaq's decision to delist the stock later in June 2020.

Comeback Story: Shortly after the fraud was identified, the company ousted its co-founder, Charles Zhengyao Lu, and made other changes to its board of directors.

Emerging from bankruptcy in March this year, Luckin’ is now controlled by Beijing-based private-equity firm, Centurium Capital.

Now valued at $4.4 billion, Luckin’ has resumed its expansion in China, according to the Journal, opening stores and nonfraudulently growing its sales.

It reported $107 million in net profit in 2021.
Ma’s Snow Lake Capital said Luckin’ represents about 15% of his holdings — its most recent 13D and 13F filings show it has $59.65 million total assets under management.

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