PE-backed Luckin files for bankruptcy in the US

The company reached a $180 million settlement with the US Securities & Exchange Commission (SEC) in December regarding the fabrication of RMB2.2 billion ($310 million) worth of sales booked in 2019 – equivalent to 75% of the total for the year through September. There is still the matter of $460 million owed to bondholders and various legal proceedings, including class action lawsuits.

Luckin, which is currently in provisional liquidation in the Cayman Islands, said in a statement that restructuring negotiations with stakeholders are ongoing and that bankruptcy protection would allow centralized administration of its assets. The bankruptcy filing does not impact day-to-day operations in China, with all stores remaining open for business.

The company’s business model has always been controversial. Founded in 2018, it became China’s second-largest coffee shop chain on the back of an aggressive store expansion program. There were 4,267 outlets as of June 2020. Costs were substantial but advocates argued that these would be brought under control through economies of scale and by leveraging technology to deliver supply chain efficiencies and better consumer insights.

The fraud – first disclosed in April 2020 – involved channeling bulk sales of discount vouchers to entities masquerading as corporate customers. At the same time, payments for raw materials and delivery services needed to satisfy these supposed coffee orders were made to fictitious suppliers. CEO Jenny Zhiya Qian and COO Jian Liu were blamed and removed from their positions.

A report filed by the provisional liquidators in December indicated that business was stabilizing after steps were taken to reduce cash burn. As of November 2020, Luckin had 3,898 self-operated stores, of which 60% were profitable. Moreover, 70% of its 894 franchisee stories had reached the gross profitability threshold at which they are required to share some upside with the parent.

Expansion has become more targeted, but the company is still targeting 4,800-6,900 self-operated stores by 2023. It has also introduced around 150 vending machines.

Revenue was RMB1.15 billion for the three months ended September 2020, up 35.8% year-on-year. Estimated revenue for the 2020 financial year is RMB3.8-4.2 billion. The company reported revenue of RMB2.93 billion for the nine months ended September 2019, up from RMB375 million a year earlier. Its net loss widened to RMB1.76 billion from RMB950 million.

As of December 2020, Luckin had RMB4.86 billion in cash and cash equivalents, of which 96% was located in mainland China.

Last July, Zhengyao Lu, the chairman and largest shareholder in Luckin, was removed from the board. The current CEO and chairman is Jinyi Guo, a member of the founding team who previously worked for Lu at Ucar, a chauffeured car services business. In January, a group of employees accused Guo of corruption and abuse of power. She denies the allegations.

Luckin raised more than $500 million in private funding from the likes of Centurium Capital, Joy Capital, GIC Private, Legend Capital, China International Capital Corporation (CICC) and BlackRock to fuel its rapid expansion plans. The company went public in the US in May 2019, around the time the sales fabrication began.

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• Topics
• Greater China
• Consumer
• Regulation
• Technology
• China
• Centurium Capital
• Joy Capital
• BlackRock
• GIC Private