On Sep. 2, Luckin Coffee (OTCMKTS:LKNCY) announced that Sean Shao was re-appointed to the beleaguered company’s board of directors. One of four independent directors, Shao’s re-appointment, was requested by Hong Kong-based Centurium Capital, who owns approximately 11.7% of Luckin stock.
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So who is Sean Shao, and why is he so important to Centurium?
Sean Shao was an independent director of the company from May 2019 until his removal on July 5, 2020, after Luckin held an extraordinary general meeting and a subsequent board meeting to change its board.
Shao had been in charge of the company’s independent investigation into the accounting issues in 2020. My InvestorPlace colleague, Mark Hake, discussed Shao in mid-August, suggesting that if he were reinstated, Shao would most likely become chairman.
In the Sep. 2 announcement, Luckin said that Wai Yuen Chong was chairman of the board while Shao was chairman of the Compensation Committee. Shao also will serve on the Audit Committee.
A Closer Look at Luckin Stock
What else do we know about Sean Shao?
Well, according to Luckin’s 2019 prospectus, Shao has a bachelor’s degree in art from East China Normal University, a master’s degree in public health care administration from UCLA, and is a member of the American Institute of Certified Public Accountants.
A 2015 press release announcing Shao’s appointment to the board of 21Vianet Group (NASDAQ:VNET) says he worked at Deloitte Touche Tohmatsu CPA Ltd. from 1994 through 2004, when he left to become the chief financial officer of ChinaEdu, that was taken private by management in 2014, long after he’d left the company.
The 2019 prospectus lists directorships for several U.S.-listed companies. These include 21Vianet, Jumei International Holding Ltd. (taken private in 2020), he resigned from the board of Lightinthebox Holding Co. Ltd. (NYSE:LITB) in April, and China Biologic Products Holdings Inc. (NASDAQ:CBPO), a Beijing biopharmaceutical company with a $4.3 billion market capitalization.
Shao’s served on its board since 2008. He owns 19,000 shares according to its 20-F. So, he’s got an accounting background, directorship experience on public company boards, and is very familiar with the Chinese business environment. These are all worthwhile attributes in a dicey situation.
How Does Sean Shao Help Luckin Stock?
On July 31, Chinese regulators found that Luckin inflated its sales by 41% between April and December 2019. It will issue fines in the future. In the meantime, Luckin needs to get on with the business of selling coffee.
As my colleague indicated in his August article, Shao appears to be the only director Centurium Capital trusts, so by default, Shao’s their savior.
In April, the three-year-old private equity firm postponed raising a second fund worth $2.5 billion. It raised more than $2 billion for its first fund, which closed in July 2019. One of its portfolio companies is a 27.7% stake in China Biologic Products, another Sean Shao board seat.
In my last article about Luckin, I stated that I was shocked that LKNCY was still trading above $2. My colleague figures its shares are worth 40-50 cents.
“If you read my previous article on Luckin Coffee, you will see that the company has $400 million in convertible senior debt due Jan. 15, 2025. I suspect these notes are in default. After $780 million in cash, that leaves a potential value of $380 million,” Hake writes.
“…I suspect that its real value is probably less than half of the $380 million after the senior notes. Let’s call it $180 million. Since there are effectively about 252 million ADRs outstanding, that puts its equity value at 71 cents per share.”
Hake gets to 51 cents by adding shares issued to satisfy some of Luckin’s debt holders.
Centurium Capital has several reasons to want to keep fighting for Luckin’s survival, not the least of which is its multi-million-dollar investment.
If Shao is the guy they believe needs to be at the table to ensure Luckin straightens up and flies right, who’s to argue with that assessment? Shao’s involvement could be the only thing holding Luckin from falling to 50 cents or lower.
So, yeah, in an indirect way, Sean Shao could be the answer to Luckin’s troubles.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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