LUCKIN COFFEE (LK) – LOSING AT THE RATE OF $320M ANNUALIZED BUT IT’S A WONDERFUL WORLD !!

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LUCKIN COFFEE (LK) – LOSING AT THE RATE OF $320M ANNUALIZED BUT IT’S A WONDERFUL WORLD !!

Luckin Coffee (LK), the most rapidly growing retailer on the planet that we know of, lost $78M, 100M, and $82M in the first, second, and third calendar quarters of this year respectively. The market value of their equity is $8.4 billion at yesterday’s closing price. For those of you not familiar with the fundamentals, you can SEARCH for our writeup in mid 2019. Suffice to say that LK is building thousands of units annually in China, is losing a great deal of money currently, but has stated plans to leverage it’s the G&A and improve store level profitability within the next 12-24 months to the point of overall profitability.

We should interject here that we are neither long nor short this situation. We provide this commentary merely to present the possibilities, in terms of raising capital, when interest rates are suppressed around the world, producing “misallocation of capital”. We are not suggesting that LK is going to fail. The predictable prize in that regard goes to WeWork. It may well result that LK proves to be one of the wildly successful beneficiaries such as Amazon, and only time will tell.

The bulls and bears can debate the merits of this situation but management has clearly voted  that the stock is adequately priced for the moment. Though LK still had a couple of hundred million dollars in the bank as of 9/30, which should have been sufficient to turn cash flow positive within the next year or so, they have registered the sale of 12 million new shares, 7.2 million for the company and 4.8M for selling shareholders. In addition, they registered the sale of $400M worth of five year convertible bonds (no doubt convertible above the market price) and that was quickly upsized to $460M because of the demand. Tongue in cheek we say:  It’s easy to understand the appeal of this bond, because the expected interest rate, between 0.5% and 1.0%, is a lot more than the negative interest rate attached to well over ten trillion of sovereign debt that trades at a negative interest rate.

The bottom line: the management and Board of Directors of Luckin Coffee have appropriately decided that the $8.4 billion value of their equity is adequate for the time being, and it is timely to raise about $700M (call it a cushion) to pursue their ambitious growth strategy. If you are going to tell a story to the investment community, make it a good one. It’s a wonderful world !!

Roger Lipton