Believe it or not, Luckin coffee is making a comeback

Some investors may have written off the stock from lucky coffee (LKNC.Y -0.91%), and for good reason. In early 2020, the hypergrowth coffee company, labeled as China’s answer to Starbucks (SBUX -1.12%)was caught falsifying sales and profit data before a major capital raise.

The result was a Nasdaq delisting and a messy ousting of the old management that was difficult and time-consuming to achieve.

However, some might be surprised that even though shares have sagged this year, Luckin’s U.S. Deposit shares, which still trade over-the-counter, are up 82.3% in 2022. Here’s how the company did and what other catalysts might be in the start.

Close the bankruptcy problem, refresh the board and return to normal

Earlier this year, the liquidation of Luckin’s convertible notes was completed and the company emerged from Chapter 15 bankruptcy. For reference, Chapter 15 is not like Chapter 11, in which a company is liquidated or restructured. Rather, Chapter 15 relates to claims on convertible notes issued to US investors to prevent further legal action against the company by such US investors.

Luckin was able to satisfy these investors by paying out cash, stock and 9% bonds to noteholders as part of an agreement reached between the Cayman Islands bankruptcy courts and the Southern District of New York. Just last month, the company actually redeemed those 9% offshore bonds, getting rid of that high-interest debt and freeing up the company’s debt.

Following the restructuring, the Cayman Islands Grand Court dismissed the case and dismissed the Joint Provisional Liquidators (JPLs).

In summary, just about all of the remaining baggage and outstanding legal questions were laid behind the company in March, so investors can look at the current numbers without worrying about more legal surprises in the future.

Recent results have been surprisingly good

Under new CEO Jinyi Guo, Luckin has actually rebounded quite well over the past two years. By steadily increasing its number of stores in a controlled manner, increasing the number of franchisees in lower-tier cities, innovating new beverage products and raising prices, Luckin has shown impressive growth and increased profitability.

In the second quarter, Luckin grew revenue by 72.4%, with same-store sales growth of 41.2% and transacting customers up 69.6%. Operating margins at the store level increased from 23.1% to 30.6%, allowing non-GAAP (generally accepted accounting principles) adjusted operating margins to increase from 1.2% to 10.4%.

These results are all the more impressive given that Luckin was operating in a generalized containment environment. In April and May, the company had 900 stores temporarily closed due to Shanghai lockdowns; however, this eased to just 150 stores in June and 100 stores in July. For reference, the company had nearly 7,200 stores at the end of June.

Since Luckin had fabricated sales numbers prior to March 2020, some may be skeptical of these recent growth numbers. However, back when the sales were being fabricated, Luckin was reporting about 500% revenue growth. So while these are robust numbers, they are much more plausible than before.

China has a very low penetration of coffee drinkers compared to other advanced economies, but the rising middle class seems to be embracing their new addiction to coffee, just like the rest of us. With this in mind, the rapid growth in coffee consumption should not be too surprising.

Is it a purchase?

Annualizing last quarter’s adjusted operating profit of $51 million to just over $200 million, Luckin doesn’t look too expensive, at around 23 times operating profit, despite around $500 million dollars in cash, or approximately 11% of its market capitalization. This valuation is in line with many large, more mature restaurant stocks, but it’s actually quite cheap if Luckin can continue to post these types of growth rates, as well as operating leverage in addition to its expenses. of business.

ADS (American Depository Share) can currently be held back by the fact that they are still traded over-the-counter. Reports circulated in January that management was attempting to relist on Nasdaq, but management did not provide details of the recent conference call, saying only that it “remains committed” to U.S. capital markets and has focused on a new ESG Sustainability Committee and updated Board of Directors.

Of course, risks remain. In addition to issues with his re-listing and questions about Chinese stocks listed in the United States, Luckin may face new competition. It was recently reported that former Luckin chairman Charles Lu, who led the 2020 fraud and then tried to sabotage the current leadership after being kicked out, is considering a new coffee company called Cotti Coffee. So while Luckin’s telling financial performance is positive, it is also likely to attract competitors.

Still, it’s a much better option than being heavily in debt and in operational difficulty. That’s why, for investors comfortable investing in Chinese companies, those who may have ditched Luckin after the 2020 sales scandal may want to take another look at the stock today. .

About Valerie Wilson

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