China's Luckin Coffee gains 20% after upsized IPO

The company sold 33 million American Depository Shares (ADS) for $17.00 apiece, the top end of the indicative range, according to a filing. Its shares opened at $25 on May 17 and closed at $20.38. The company was reported to have originally set the number of shares for sale at 30 million but later increased the amount, according to Bloomberg.

Founded in 2018 by Zhiya Qian, formerly COO at car rental business CAR and chauffeured car service spin-out Ucar, Luckin operated 2,370 stores across 28 cities in China as of March, up from just 290 a year earlier. All stores are owned and operated by the company. A total of 90 million items were sold in 2018, of which about 30% were non-coffee products, according to the IPO prospectus.

Nevertheless, the company's battle for market share has come at considerable cost. In the first three months of 2019, Luckin incurred a net loss of RMB551.8 million. Revenue for the period was RMB478.5 million - three-quarters of it from the sale of freshly brewed drinks - while marketing and store rental expenditure came to RMB168.1 million and RMB282.4 million, respectively. Doubts surrounding the company’s ability to deliver profit have been mounting among observers, who argue the company’s quick expansion has largely been built on huge subsidies given to customers and thus bears huge uncertainty once it stops doing so.

Qian told Chinese media outlet Leinews after the IPO that the company will focus on expanding quickly for the next three to five years without considering profitability. “We have a customer retention rate of 89.6%, which proves how popular our products are in China. Good value for money and high convenience will continue to be two core strengths of Luckin,” said Qian.

Echoing the views of Qian, David Li, ex-Warburg Pincus China head and founder of Centurium Capital, the largest institutional investor in Luckin, told Leinews that Luckin has just taken off, and the company could transform itself into a company similar to 7-Eleven or Costco and eventually a platform like Amazon that could meet the diversified needs of customers.

“The model of Luckin is a true embodiment of the new retail concept. The company relies on its app to approach and attract customers, while its offline stores are mostly just a delivery center for the products. This model has allowed the company to reduce its rent and automate the whole transaction process,” he said.

Luckin secured $200 million in Series A funding within six months of its inception last year led by Centurium, which contributed $100 million. Joy, GIC Private, and Legend Capital also participated. In December, these investors re-upped for a $200 million round that also featured China International Capital Corporation (CICC). Centurium is understood to have contributed $80 million to the second round, making it the largest institutional investor with an 11.9% stake. Joy was second with 6.75% before the offering. Centurium currently holds around a 10% stake, according to Li.

Just days before the offering, BlackRock committed $125 million on its own. The deal is seen as a move to hedge the firm's exposure to Starbucks, in which it has a 6.58% stake.

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• Topics
• Greater China
• IPO
• Consumer
• Technology
• Centurium Capital
• Joy Capital
• BlackRock
• GIC Private
• Legend Capital
• CICC
• Consumer
• IPO