Chinese coffee chain super-brand Luckin Coffee was in the spotlight last week after the company revealed in a SEC file that it had launched an internal investigation into suspected fraud of $ 300 million dollars from its former chief operating officer. That led the stock to drop nearly 80% on Thursday.
The bad news continues to multiply. The stock fell further 15% today as investors continue to understand the company’s disclosure and its positioning in the competitive Chinese coffee market, where the company replaced Starbucks. as a leader in retail and delivery in just a few years. The company’s market capitalization is now just over $ 1 billion according to Yahoo Finance – a huge drop from its valuation of around $ 4 billion immediately after the IPO.
This massive drop is putting tremendous pressure on banks that have made loans to buy stocks on margin. We learned this morning from Jing Yang at the Wall Street Journal that a structured loan to one of the company’s executives could result in losses of more than $ 100 million:
Goldman Sachs Group Inc. said on Monday that a group of lenders is selling 76.3 million US depository shares of Luckin after an entity controlled by Luckin chairman Charles Zhengyao Lu failed in under a $ 518 million margin loan. Goldman acts as an “assignment agent” for lenders, which means it helps facilitate the sale in one or more transactions.
Yet despite all the bad news, there have been some silver liners.
Mobile intelligence Apptopia sent me this table of downloads for the company’s iOS app, showing a huge bump following news of the suspected fraud last week.
This massive madness was caused by two competing forces, which act together as a Rorschach test for observers of the Chinese market. In the most idealistic version, Chinese consumers have gathered around the company as a form of Chinese nationalism against the American coffee chain Starbucks, in addition to supporting the company’s more affordable prices. As Jiayun Feng on the popular Chinese network SupChina reported:
On Chinese social media, most people – especially loyal customers of the coffee chain – were not bothered by the scandal, saying they would enjoy every second of Luckin while it lasted. “As a person living on a limited budget, I don’t care if the company’s financial practices are illegal or not. I just don’t want to lose an affordable alternative to Starbucks, ”says a typical Weibo comment (in Chinese).
But the other more pecuniary force is that Luckin’s explosive growth in recent years has been driven by large discounts and coupons as well as prepaid coffees – coffees that could be very difficult to obtain if the fraud of the business is more generous and leads to bankruptcy. Take these two examples of tweets:
This increase in downloads is therefore a testament to the company’s support – and perhaps also a sign that few customers want to give up their gifts.
The bigger question as investors digest the news is how to deal with the scale of fraud for a NASDAQ-listed stock that follows US accounting rules as a publicly traded company. How could a stock that has been extremely popular among retail investors and day traders be built on such a sandy base? How could such significant fraud not be detected by the auditors?