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Having lost 95% of its value, and its main listing on the NASDAQ, Luckin Coffee (OtherOTC:LKNCY) is the proverbial dead parrot in the Monty Python sketch. Or is it resting?
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The beautiful plumage is hope that audited financials may reveal sales and the promise of profit. The most recent quarter available ended last September and showed sales of $220 million. Given a market cap of $549 million that sounds reasonable. It would mean Luckin is selling for eight months’ sales.
But can you trust that $220 million figure?
Luckin Stock Self-Examination
Technically, Luckin is neither American nor Chinese. It’s based in the Cayman Islands, like many other Chinese companies, including Alibaba Group Holding (NYSE:BABA).
Luckin has conducted its own probe of its activities under director Sean Shao, who then resigned. People were fired and business relationships were terminated. Centurium Capital, whose chairman controlled 11.7% of Luckin at its IPO, wants Shao back on the board. A meeting has been scheduled for September.
China’s State Administration for Market Regulation substantiated the audit’s charges. It determine Luckin fabricated $315 million in sales through “merchandise vouchers.” These were promises of future sales the chain booked as real money. Authorities also found about $140 million in dubious purchases from suppliers linked to CEO Charles Lu and his various enterprises.
Now Lu is in the process of taking his main company, car rental giant Car Inc., private. Standing in the way is that 29% of the firm is now owned by a state-linked company, which got into the deal through UCar, Lu’s ride-hailing service. That deal would put UCar under the umbrella of its main competitor, eHi car.
Thaddeus Neururer, assistant professor at the University of Akron, said the scandal challenges both Chinese accounting and corporate governance. The scandal “should give investors pause when it comes to allocating large amounts of capital to Chinese firms. … Chinese firms and their audits are not necessarily reviewed by the Public Company Accounting Oversight Board even if they raise money in the United States,” he said.
But the problems aren’t unique to China. Wirecard, a German transaction processor which also collapsed this year due to fraud, “employed Ernst & Young, one of the big four auditors,” which “still failed to verify the existence of cash reserves hidden by fraudulent bank statements,” Neururer said,
Mohammad Niamat Elahee, a professor at Quinnipiac University, agreed. “China is still years behind the West in developing a corporate culture and a regulatory regime that will value accountability and transparency,” he said. American investors may now be wary of Chinese stocks. The U.S. government will likely remain hostile to China regardless of which party wins the November election.
Bottom Line on LKNCY Stock
China has cracked down on Luckin, after ignoring scandals at firms like TAL Education. But it has yet to act against the people behind the fraud, like Mr. Lu.
InvestorPlace contributor Luke Lango insists LKNCY stock is not dead, and not going bankrupt. The market for fast-casual coffee in China is real, he writes, and Luckin’s business model works. He insists speculators can still speculate on it.
In America, companies that commit fraud don’t come back. Enron didn’t come back, except through units now controlled by Kinder Morgan (NYSE:KMI) and other big companies. The equity goes away, the pieces get picked up, and investors buy what emerges.
If the people behind this fraud are punished, the way Enron and Worldcom were punished, and if regulations become more transparent, the scandal may prove to have a silver lining. While you may want to speculate on Luckin coming back, that’s a bet and not an investment. Don’t throw any money at it you can’t afford to lose.
For investors, this is an ex-parrot.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in BABA.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.