Luckin Coffee (OTC: LKNCY) Sliding Into the Can: Filing for Bankruptcy

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Karma has come back to bite Luckin Coffee in the butt – the Chinese coffeehouse chain that faked sales to inflate its stock price.

Luckin Coffee (OTC: $LKNCY) has officially filed for Chapter 15 Bankruptcy, leaving its investors questioning the survival of the company. They have claimed that business in their brick-and-mortar stores will resume as usual, but stocks are plummeting, falling 45% shortly after the announcement.

IBR smelled the coffee burning and called the BS. See our short call back in January 2020 here.

Where There’s Smoke There’s Usually Fire


Luckin Coffee’s IPO back in May of 2019 garnered quite a buzz and attracted many investors who were quick to jump on board the potential Starbucks killer, pushing the stock higher.

It didn’t take long for the buzz to turn into hype around the ‘overnight unicornout of China, and with the seemingly too good to be true financials, the stock price was soaring. It saw prices of over $50 at one point, while the company was boasting about its impressive sales numbers. As most houses built out of cards, this too had to fall.

Luckin Coffee eventually succumbed and admitted to fraudulent accounting practices, including inflating their sales by as much as 2.2 billion yuan, or US$310 million.

The company was fined $180 million, but their nightmares didn’t stop there, as their stock plummeted 80% after admitting to fraud. Right after the scandal broke out, Luckin Coffee was delisted from NASDAQ.

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After filing for Chapter 15 Bankruptcy, the stock unsurprisingly fell 45% and it could very well be headed to zero.

Needless to say, investor confidence is at an all-time low for Luckin Coffee, even before the news broke that they filed for Chapter 15. The company is on its way to even lower lows, and we are highlighting this as a prime time to short Luckin Coffee. The company has no gas left in the tank and could be well on its way to liquidation.

Or the stock could fall as another victim in the Reddit meek heads’ thirst for anarchy.

 

Here’s The Rundown of What Happened


2019 Q3 Filing reporting a 557.6% increase in total net revenues and an increase of 470.1% in average monthly items sold compared to the same quarter of 2018.

As of January 2020, the company was worth US$12 billion and managed over 4500 stores, exceeding the number of Starbucks stores in China.

On January 31st, 2020, an anonymous report, published by Muddy Waters Research, found that the company was indeed in “muddy waters” as it had committed fraudulent activities. Stating that the company had inflated its number of items sold every day by at least 69% in the third quarter and 88% in the fourth quarter of 2019.

On April 2nd, 2020, Luckin Coffee disclosed to the world that an internal investigation found its chief operating officer, Jian Liu, had fabricated the second to fourth quarters of 2019 sales by about 2.2 billion yuan (US$310 million).

April 6th, we see the time right to take some money off the table and bag a solid 90% return. We believe that there might be further downside to the stock – but we also know the pigs get fed and the hogs get slaughtered.

As of May 12th, 2020, both the chief operating officer, Jian Liu, and the chief executive officer, Jenny Qian Zhiya, were fired, and both resigned from the company’s board.

On May 19th, 2020, the Nasdaq ordered a delisting notice to Luckin, making the future of the shares uncertain. The stock dropped even further from April 2nd, 2020, to $1.33 following this news.

On February 5th, Luckin Coffee’s Restructuring Efforts Move Forward with Commencement of its Chapter 15 Case in the United States.

 

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Luka Marjanovic

Partner

Luka holds a Bachelor’s in International Business and a Master’s in International Management. During his undergraduate studies he worked as a research assistant in the field of Big Data; founded his own consulting firm providing services to local SME's in various sectors and invested in the capital markets; as well as working pro-bono providing education and career counselling. Prior to his business education, he studied Biology-and-Biotechnology, and served in the Danish Royal Army as Second Sergeant, leading and managing a group under extreme conditions and pressure. Luka has spent significant time abroad, living and working in seven different countries. When he's not in the office, he's chasing the next gusts windsurfing, carving the mountain snowboarding or out in the forest for a jog.