Centurium takes control of China's Luckin Coffee
Centurium Capital is now the controlling shareholder in Luckin Coffee, having teamed up with IDG Capital and Ares SSG to take out interests formerly owned by executives of the scandal-hit Chinese coffee shop chain.
The 383.4m class A ordinary shares – held by entities under the control of Zhengyao Lu and Zhiya Qian, Luckin’s ex-chairman and CEO, respectively, and their families – were ordered to be wound up as part of liquidation proceedings. The High Court of Justice of the British Virgin Islands sanctioned the secondary sale to the private equity firms earlier this month.
The transaction removes former management members from the company’s cap table. Lu, Qian, and other senior executives were architects of the fabrication of CNY 2.2bn (USD 310m) in sales in 2019, amounting to three-quarters of the annual total through September of that year.
The shares represent a 16.52% interest in Luckin. According to the company’s 2020 annual report, there were 1.88bn class A ordinary shares as of July 2021 and 144.8m class B shares. Centurium already controlled 100% of the class B shares at that time, giving it a 43.5% voting interest.
Luckin was relegated from NASDAQ to the over-the-counter market in June 2020, shortly after the fraud was exposed and its stock collapsed to USD 1.38, having hit USD 50 in January that year. It closed at USD 8.73 on January 27, giving the company a market capitalisation of approximately USD 2.2bn.
Centurium was responsible for USD 180m of the USD 500m private investors pumped into Luckin between its 2018 inception in 2018 and its May 2019 IPO. In April 2021, Centurium subscribed to USD 240m in convertible preference shares, describing it as a sign of faith in the company’s business model. Joy Capital, another early backer, put in a further USD 10m.
The proceeds went towards a USD 180m settlement with the US Securities & Exchange Commission (SEC) and a restructuring of USD 460m in senior notes. That restructuring was finalised last month.
“We are committed to supporting our portfolio companies to build sustainable business models, robust and transparent corporate governance and responsible management systems, and we will continue to support Luckin’s long-term growth and development,” Centurium said in a statement following the latest transaction.
Luckin rose from nothing to become one of the country’s largest coffee shop chains in the space of 18 months, pursing scale with an apparent disregard for financial sustainability. It was argued that costs would be brought under control through economies of scale and technology. Luckin’s outlets are small and have relatively few staff, emphasizing collection and delivery and digital payments.
Operations continued despite the liquidation proceeding and a bankruptcy filing in the US. There were 5,671 outlets as of September 2021, exceeding the previous of 5,091 in June 2020. This includes 4,206 self-operated stores and 1,465 run by franchisee partners. The comparable figures for December 2020 were 3,929 and 874.
Revenue reached CNY 4bn (USD 618.1m) in 2020, up from CNY 3bn the previous year. Over the same period, the net loss widened from CNY 3.16bn to CNY 5.6bn, although much of the increase was provisions for settlements and litigation. Operating losses narrowed from CNY 3.21bn to CNY 2.59bn, in part due to cuts in sales and marketing expenses.
In the third quarter of 2021, revenue reached CNY 2.35bn, up 105.6% year-on-year, while the net loss fell 98.6% to CNY 23.5m. The operating loss was just CNY 6.7m, with Luckin reporting that self-operated stores alone generated an operating profit of CNY 452.1m and a store-level operating profit margin of 25.2%.
The coffee shop concept continues to attract investors in China on a more general level. Last year, a special purpose acquisition company (SPAC) sponsored by Liang Meng, founding managing partner of China’s Ascendent Capital Partners, agreed to merge with PE-backed Tim Hortons China at a valuation of $1.8 billion.
The company was on course to reach 458 stores by the end of 2021, with 62 already opened year to date, 65 under construction, and 194 sites approved or under negotiation. It is targeting 2,750 outlets by 2026. Starbucks has about 5,400 outlets nationwide.
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