Luckin Coffee: A new generation of Chinese Fraud 2.0 has emerged…

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By Jing Yang in Hong Kong, Juliet Chung in New York and Julie Steinberg in London
June 29, 2020 5:30 am ET

In January, days after the shares of Luckin Coffee Inc. hit a record high on the Nasdaq Stock Market, giving the company a $12 billion valuation, a cryptic email arrived in the inboxes of multiple short sellers.

https://www.wsj.com/articles/coffees-for-closers-how-a-short-sellers-warning-helped-take-down-luckin-coffee-11593423002?mod=e2tw

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This article first appeared in The Edge Malaysia Weekly, on April 27, 2020 – May 03, 2020.

LEGENDARY billionaire investor and Berkshire Hathaway CEO Warren Buffett once said, “Only when the tide goes out do you discover who’s been swimming naked.” The recession that followed the dotcom crash in 2000 and 9/11 terrorist attack in 2001 saw the unravelling of high-flying energy firm Enron, telecom firm WorldCom as well as conglomerate Tyco. As the 2008 recession unfolded in the aftermath of the subprime mortgage crisis, former Nasdaq chairman Bernie Madoff admitted to running a Ponzi scheme by cooking the books of his hedge fund, which delivered consistently high returns in good times and bad. The current coronavirus-induced recession has so far not produced a single high-profile bankruptcy, though one Chinese firm, Luckin Coffee, is now on the brink.

The Xiamen-based coffee chain operator had emerged as yet another icon of the high-growth consumer business in China, with huge sums of early-stage funding that helped position it as a threat to behemoth Starbucks Coffee Co. In May last year, Luckin listed in the US with much fanfare, boasting a stratospheric valuation of more than 30 times its annual sales and losing almost as much money on every cup of coffee it sold as it spent on actually making it. At its peak in January, with a market capitalisation of around US$12.5 billion (RM54.6 billion), Luckin was trading at nearly 50 times its real annual sales. Not even the fastest-growing software firms command such a valuation.

Not surprisingly, within eight months of its Nasdaq listing, Luckin’s luck was running out and its business model was coming undone. On April 2, it disclosed that nearly half of the revenues it had reported in the last three quarters of last year, or RMB2.2 billion (RM1.36 billion), was actually plucked out of thin air rather than derived from selling a lot of coffee. Luckin blamed chief operating officer (COO) and board director Liu Jian for the misconduct, which came to light after an internal investigation by its auditors Ernst & Young found that Liu and several other employees had overstated early revenue figures. The Edge obtained Liu’s email address but he has so far not responded to our queries or addressed the allegations.

Luckin’s stock cratered after the allegations first surfaced in early April, losing nearly 84% of its value. The stock is down nearly 90% from its peak and is currently suspended from trading. That brings me to another famous Buffett quote. “There is seldom just one cockroach in the kitchen,” the billionaire known as the Oracle of Omaha once said of corporate malfeasance. “When you see one cockroach in a corporate cupboard, his relatives are nearby,” he said.

Clearly, the overstating of Luckin’s revenues for three consecutive quarters — the one preceding its listing, the one during which the firm listed and the one immediately following its listing — to the tune of half of its total sales is not the only cockroach at Luckin. How could the COO, a director of the board and a long-time close confidant of the firm’s founder, pull off something like that? Who knew about the elaborate scam? How long had they known?

For the rest of the article:

https://www.theedgemarkets.com/article/tech-why-luckin-coffee-now-toast

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