If Hertz Can Come Back, Why Not Luckin Coffee?
Hertz Global Holdings Inc. filed for bankruptcy a year ago, when its vehicle rental business was shut down due to Covid-related lockdowns. It has now not only escaped from protection, but institutional investors have bought up the shares to acquire ownership of the venerable firm in a spectacular comeback. Hertz was able to fully repay its debt and provide a generous reward to stockholders who remained with it during the tough times. It was one of the earliest meme stocks, with fans purchasing it even as the company’s finances plummeted. Stockholders are usually wiped out when a company declares bankruptcy and restructures. They’ve been rewarded with Hertz.
Can an American company’s excellent fortune be replicated in a troubled, if not notorious, Chinese brand?
Luckin Coffee Inc. also has devout followers who are unconcerned about the company’s recent bankruptcy proceedings in the United States. Its shares, which are now traded over-the-counter on pink sheets, have surged in recent days due to high trading volume. Investors lifted the infamous Chinese coffee chain operator’s market worth to $3.3 billion, giving it more equity value than recently listed Membership Collective Group Inc., the owner of the fashionable Soho House clubs.
Not bad for a firm that admitted to faking 2.2 billion yuan in sales in 2020, was delisted from Nasdaq, and agreed to pay the Securities and Exchange Commission $180 million in fines. What’s reawakening interest in Luckin?
But you’re not worthless just because you’re bankrupt.
After recent strong price rises, Luckin Coffee, which filed for bankruptcy in the United States in February, is now valued almost $3.4 billion.
Despite its legal woes, Luckin kept its shops open in China. And the economics have finally begun to work. According to the liquidators’ report to a court in the Cayman Islands — where Luckin is incorporated — the company achieved store-level profitability for the first time in August. Its 2020 sales are expected to reach between 3.8 billion yuan and 4.2 billion yuan ($587 million and $649 million), or 26% year-on-year growth at the low-end.
Mitsubishi Heavy Industries Group Luckin clearly wants to move on from its troubles. On June 30, it filed restated financial results for 2019 with the SEC. These did not show additional inflated sales beyond what it confessed to a year ago. It also promised to release its 2020 results “as soon as possible” and to maintain an active English-language website to cater to U.S.-based investors. Coupled with paying the steep SEC fine, Luckin appears to be trying to make itself eligible for New York’s deep pools of money again.
How distressed is Luckin? Some of its early investors have stuck around, willing to go the extra mile to keep it alive. In April, the company received about $250 million in investments from Chinese private equity firms Centurium Capital and Joy Capital, enough to pay its SEC fine and the first cash outlay for its offshore debt restructuring. Luckin said it had already received approval from the Chinese government to transfer the funds abroad. As of last November, the latest financial report available, it held only $32.4 million in cash offshore.
In March, Luckin restructured 59% of a $460 million convertible bond that had gone into default. It had originally been issued in January 2020 when its shares were riding high. The company is promising a respectable 91% to 96% recovery rate, with 32% of par paid in cash upfront. Debt restructuring is an essential step to help Luckin get out of the U.S. bankruptcy, which it entered into in February 2021.
Just like Hertz in the U.S., Luckin in China has not lost its brand appeal despite the accounting scandal. According to a local survey of consumer preferences — from flavor to environment to service — Luckin ranked competitively against Starbucks Corp., and better than McDonald’s Corp.’s McCafe, which is a close price competitor. Starbucks, Luckin and McCafe are the top three chain operators in China by number of stores. Luckin is not slowing down, either: It has set an ambitious target of 4,800 to 6,900 self-operated stores by 2023. It had 3,898 shops as of November.
In other words, Chinese consumers don’t care who owns Luckin, or what its quarterly financials look like. As long as the coffee is decent and doesn’t burn a hole in their wallets, they will buy the Little Blue Cup. This in turn gives Luckin some enterprise value as it works to exit bankruptcy protection.
