Luckin Coffee Inc

DescriptionWhy am I pitching long on a company that most of you remember as a fraud? Because in my latest trip to China, I was shocked to discover that Luckin not only has survived the covid lockdown and legal challenges but also has grown to become the leading coffee brand in China. Tens of millions of Chinese consumers consider Luckin Coffee as a reputable brand with good products. This presents an under-the-radar opportunity to invest in a company with a checkered history but very promising prospects. Please skip this idea if you avoid stocks traded solely on OTC due to low liquidity. The potential of China’s coffee market is massive With SBUX opening stores at a rapid pace, one would think that China’s coffee market is quickly maturing. Yet the reality is the contrary: the coffee market in China remains vastly untapped. A Chinese person on average consumes about 12 cups per year(SBUX 2022 Investor Day est), a stark contrast to the 2 cups per day average consumption number in the U.S. Average coffee consumption goes up even higher to more than 3 per day in some European countries. Even compared to other places in Asia, China’s consumption number severely lags: Korea 367/yr, Japan 200/yr, Hong Kong 250/yr, and Taiwan 104. Evidently, there's about 10-20X growth potential to just reach the current Asian average, which is also growing faster than RoW. There’s an astounding 60X expansion if Chinese drink as much coffee as Americans do. Furthermore, according to this research done by iResearch China(https://pdf.dfcfw.com/pdf/H3_AP202207221576448813_1.pdf?1658500284000.pdf),freshly brewed coffee made by companies such as Luckin and SBUX, only commands 35.5% of market share in China whereas in the U.S., freshly brewed coffee has 87.0% market share and in Japan 63%. Further penetration of freshly brewed coffee towards 70% would give another 2X multiplier effect on Luckin’s TAM. Another multiplier effect is the faster than industry average growth in the coffee takeout segment, Luckin coffee’s main distribution channel. Recent data (https://m.canyin88.com/zhuanlan/CBNDataxiaofeizhan/2023/0712/91638.html) reveals over 20% CAGR in the last 3 years for the 5 biggest cities with the growth in 2023 being the fastest for take-out coffee. The accelerating growth in 2023 suggests that the growth in take-out is a structural trend beyond temporary COVID-related boosts. Moreover, Luckin’s overseas ambition adds to its growth equation – the company just opened 7 stores in Singapore this year. Product and User Experience Luckin serves affordable,delicious, and innovative coffee with speed and convenience.. Luckin’s drinks, after ever-occurring discounts, cost about 10-15RMB a cup. Luckin’s price severely undercuts Starbucks’ average price of 35-40 RMB and even McDonald’s and KFC’s 15-18 RMB. Luckin’s coffee price is cheaper than most of its competitors’ and on par with tapioca tea. Luckin’s coffee is too light to any regular coffee drinker. Even their topline black coffee with their best coffee beans still comes off as too bland: they probably only use half a shot of beans for all their drinks. With only a hint of bitterness and a bit less sweeter than tapioca tea, the best stock screeners believe Luckin coffee gets easily adopted by the young crowd who are Luckin’s core customers. Young Chinese, accustomed to very sweet and milky tapioca tea, love Luckin Coffee. Luckin’s coconut milk based coffee series is such a huge phenomenon that all other competitors had to come out with their own versions or risk losing market share. I tried the mint version during this hot summer in China and I have to say for the price of 14 RMB($2) it’s unbeatable. And they are NOT burning cash doing it this time– Luckin’s GAAP operating margin in Q2 23 just surpassed that of SBUX. The stores I visited are in bustling locales like subway stations and shopping malls. However, they adopt a more subtle stance, often nestled in distant corners, yielding premium spots to brands like Starbucks that emphasize in-store experiences. Upon arrival at a Luckin store, an immediate realization dawns – the absence of a physical point-of-sale machine precludes traditional in-person ordering. Instead, the ritual unfolds digitally, exclusively through Luckin's app or the two superapps, Alipay and WeChat. Inside, the ambiance is modest and uninviting, featuring 2 small round coffee tables each with a duo of chairs, all within a snug space one-fifth the expanse of a typical Chinese Starbucks.Sitting on the not so comfortable chair waiting for your order to be made, you will witness a tireless crew making a long list of drinks. There are constantly 10-20 drinks ready for pick-up sitting on the counter to be picked up either by the customers or the delivery people. Your drink is usually done within 10 mins. You pick it up and get it on your way. 99% of Luckin Coffee 10K stores do not offer a third place to chill, to socialize, or work - they are more like ghost kitchens. History and development post fraud allegationsAccording to the best stock research websites, two of Luckin’s co-founders committed one of the biggest frauds in the history of Chinese ADRs, leading to their termination. The old management was purged and a new slate was brought in to run the coffee chain with the exception of the current CEO Dr Jinyi Guo, another co-founder of the company. I initially questioned the wisdom of selecting yet another co-founder for the top job as his resume leans heavily towards academia. The reason is because an outsider CEO is considered almost a taboo in the business culture of China - almost all privately owned companies in China are run by its founders. However, Dr. Guo is more of a symbolic figurehead to hold the company together, given that he only holds 1.3% stake of the company. In fact, the entire management only holds 3.4% of the company. The real boss is a Chinese PE firm called Centurium Capital(https://www.centurium.com/). It invested in the company via convertible senior preferred shares in 2021 and bought out the disgraced founders’ entire stake in 2022. As a controlling shareholder, Centurium now controls about 33% of the total diluted shares and 55.7% of voting power. Fast forward to 2023, Luckin has resolved all security litigations and paid out the vast majority of the fines. Legal fees associated with litigations dropped to 0.6mil USD in the latest Q, signaling an end to Luckin’s darkest period of company history. Although Luckin lost the trust of investors, its brand did not endure significant damage in the eyes of the consumer. The new management pruned its unprofitable locations and opened new profitable stores at a blistering pace. Net store count reached more than 10K at the end of Q2, doubling within a difficult 3-year span in China characterised by periodic extensive lockdowns. Its monthly transacting users soared to 43 mil in Q2 this year from 6.6mil in 2020. Revenue in 2022 tripled compared to 2020 and H1 2023 revenue grew more than 80% compared to H1 22.Same store sales growth for the last 6 quarters has been consistently at 20%+ with the exception of Q4 ‘22. When the whole nation was going through the longest and strictest lockdown in Q4 ‘22, Luckin still managed a nearly 10% growth. This is a growth machine. And this time, their approach is sound: store level operating margin reached almost 30% in Q2 and GAAP net-income margin is at 18.7%. CompetitionStarbucks is not a major competitor to Luckin. Luckin positions 48% of its stores in office buildings and 12% on campuses while Starbucks stores are mainly in high-traffic shopping areas. Luckin focuses on to-go coffee while Starbucks caters to customers drawn to its third-place experience. The real competition arises from other coffee chains focusing on take-out and tapioca tea. Scale brings tremendous competitive advantage within the budget take-out coffee sector. Volume-based discounts on materials and equipment empowers Luckin to maintain a strong price competitiveness against rival brands. Arabica coffee beans are highly sought-after global commodities. To reduce coffee beans cost from import, China has grown its own Arabica coffee beans in Yunan province. Luckin, along with other big coffee players like Starbucks, is able to source directly from Yunam coffee farms at favorable rates. Luckin is also building its second state-of-the-art coffee roastery in order to fully roast all its beans in-house.This sets Luckin apart as one of the very few brands, aside from Starbucks, equipped with such a significant roasting facility. This vertical integration not only eliminates intermediary costs but also safeguards consistent flavor and quality across their coffee offerings. Lastly, Luckin’s massive delivery volume allows the company to get a much cheaper rate on delivery compared to its smaller competitors because small chains have no leverage against the delivery duopoly controlled by Meituan and Alibaba’s Eleme.Notably, Luckin coffee only charges a 3 RMB delivery fee per cup compares to Starbucks’ 6 RMB(almost a dollar). If scale is crucial for Luckin's success, surpassing its scale seems unlikely for any competitor. Let's examine the rapidly expanding competitor, Cotti Coffee. Created by the same disgraced co-founder from Luckin, at the end of July, Cotti had amassed 5,000 stores, many of them franchised. Cotti mimics Luckin's strategies, except their coffee is notably subpar. While Luckin retains a hint of coffee flavor, Cotti's brew tastes just like water diluted sweet milk. Cotti tried to undercut Luckin on price but Luckin matched Cotti so now coffee prices from these two brands are about the same. Yet while Luckin is running its stores very profitably in this price war, many Cotti franchisees’ are complaining that they are losing money selling Cotti. Cotti’s store closing rate is alarmingly high, already reaching the hundreds per month. So while a competitor can try to open stores as fast as they can, to run stores profitably against Luckin proves to be much harder. On the other hand, Luckin is adding stores in a very thoughtful way. For tier 1 and tier 2 cities where coffee is proven to be a great business, Luckin opens self-operated stores. For the rest of the country, an unproven yet high potential growth market, Luckin opts for a franchise model. It sells all the equipment,software, and materials needed to run the franchised store, train the store employees,and charges a fee based on gross revenue. Luckin is leveraging its brand to penetrate the lower tier city market in a very low risk and capital light manner. Cost of equity calculatorCost of debt calculatorWACC calculatorLuckin’s main competition is from tapioca tea. In 2020 it was estimated that the consumption of bubble tea was 5 times that of coffee in recent years according to WikiPedia. A bet on Luckin is also a bet on the continued high growth of coffee and defending or even taking share away from tapioca tea. Bubble tea is typically made from tea (often black tea), milk, syrup, and a special ingredient called tapioca pearls. Its consumption is very high among young people in their 10-30s but drops off precipitously among older people who feel the drink is too sweet and unhealthy. Coffee, on the other hand, is a drink that can be enjoyed by a much wider audience. Before Luckin introduced affordable coffee to China, coffee had a smaller customer base than tapioca tea due to its higher price point. Usually, tapioca tea costs 10-15 RMB in tier 1-2 cities and 5-7 in the rest of the country, which is only a fraction of the cost of Starbucks coffee. But Luckin made coffee very price competitive against tapioca tea. Based on a recent Bloomberg article on IPOs of Chinese tapioca tea brands, Luckin has grown to be the second biggest chain across coffee and tapioca tea brands within a very short amount of time based on store count. Valuation Lack of analyst coverage and limited queries during the call make estimating Luckin's EPS challenging. However, considering it earned 0.48/ADR during Q2 ‘23, I think a conservative projection points to at least $2/ADR for the next twelve months. This assumes growth, from 1K - 1.5K net new store opening per Q and 10% SSSG(Luckin’s average SSSG for the last 6 months is over 20%), will be partially offset by the current promotional environment and less profitable colder seasons. An optimistic scenario could put Luckin’s NTM EPS at $2.5/share. This assumes, based on a 5K store addition and 20% SSSG, EPS double to around $1 in Q2 24. The hot weather in Q3 23 will help Luckin sell its high-margin signature icy drinks, pushing EPS to be somewhere between 0.6-0.8/EPS. Then we have 2 colder seasons with lower volume, partially offset by growth in store count and SSSG. The company also has about $2.4/ADR net cash. Given the current stock price, we are looking at 15X TTM EPS. This is exceptionally cheap for a company with a rapid revenue and profit growth for the foreseeable future. It’s clear that Luckin’s majority holder,being a profit-driven PE fund, wants to cash out. I believe the best way for them to exit is to re-list Luckin on the HK stock exchange.I think it is only a matter of time for Luckin to pursue a HK listing.

为何我会看多一家多数人仍记得曾涉欺诈的公司？因近期访华时，我惊讶地发现瑞幸不仅熬过了新冠封控与法律纠纷，更已成长为中国咖啡市场的头部品牌。数千万中国消费者将瑞幸咖啡视为产品过硬的信誉品牌。这为这家过往履历充满争议但前景光明的公司，带来了一则被市场忽视的投资机遇。若因流动性不足而规避仅在场外交易市场（Over-the-Counter, OTC）挂牌的个股，请略过此投资思路。

中国咖啡市场潜力巨大。尽管星巴克（Starbucks, SBUX）正以高速拓店，市场或许会认为中国咖啡市场正快速成熟，但实际情况恰恰相反：中国咖啡市场仍存在大量未开发空间。中国人年均咖啡消费量约为12杯（星巴克2022年投资者日估算值），与美国日均2杯的消费量形成鲜明对比；部分欧洲国家的日均消费量更可达3杯以上。即便与亚洲其他地区相比，中国的咖啡消费量也大幅落后：韩国年均367杯、日本200杯、中国香港250杯、中国台湾104杯。显然，仅需达到当前亚洲平均消费水平，中国咖啡市场便拥有10至20倍的增长空间，而亚洲市场的增速也高于全球其他地区。若中国人均咖啡消费量达到美国水平，市场则将迎来惊人的60倍扩张空间。

此外，根据艾瑞咨询中国（iResearch China）的调研数据：瑞幸、星巴克等品牌提供的现磨咖啡在中国市场仅占据35.5%的份额，而美国现磨咖啡市场占比达87.0%，日本为63%。若现磨咖啡的市场渗透率进一步提升至70%，将为瑞幸的可触达市场（Total Addressable Market, TAM）带来额外2倍的乘数效应。另一重乘数效应来自咖啡外卖赛道——瑞幸的核心分销渠道——的增速高于行业平均水平。近期数据显示，中国五大一线城市的咖啡外卖业务近三年复合年增长率（Compound Annual Growth Rate, CAGR）超过20%，2023年的外卖咖啡增速更是创下新高。2023年增速的进一步加快，表明外卖咖啡的增长是结构性趋势，而非新冠疫情带来的短期提振。此外，瑞幸的海外扩张计划进一步助力其增长：今年该品牌已在新加坡开设7家门店。

产品与用户体验
瑞幸以速度与便利性提供平价、美味且富有创意的咖啡产品。在常规折扣后，瑞幸饮品的单价约为10至15元人民币。其售价远低于星巴克35至40元的均价，甚至低于麦当劳与肯德基的15至18元定价。瑞幸的咖啡售价低于多数竞品，与珍珠奶茶（tapioca tea/bubble tea）价格相当。
对于常规咖啡饮用者而言，瑞幸的咖啡口感偏淡。即便使用顶级咖啡豆制作的招牌黑咖啡，口感仍显寡淡：推测其每杯饮品仅使用半份咖啡豆萃取液。这款咖啡仅带有微弱苦味，甜度也低于珍珠奶茶，因此极易被作为核心客群的年轻群体接受。习惯了高糖高奶珍珠奶茶的中国年轻人，普遍喜爱瑞幸咖啡。瑞幸的椰乳咖啡系列引发了巨大的市场反响，所有竞品都不得不推出同类产品，否则将面临市场份额流失的风险。今年夏日访华时，我尝试了瑞幸的薄荷风味椰乳咖啡，不得不说，14元人民币（约2美元）的售价下，这款产品极具竞争力。
且瑞幸此次并未烧钱补贴——2023年第二季度，瑞幸的公认会计原则（Generally Accepted Accounting Principles, GAAP）营业利润率已超过星巴克。

我到访的瑞幸门店多位于地铁站、购物中心等繁华地段，但门店选址往往较为隐蔽，常设在角落，将黄金铺面留给注重线下体验的星巴克等品牌。进入瑞幸门店后，你会立刻发现：店内无实体收银机，无法进行传统线下点单，所有点餐流程仅能通过瑞幸APP或支付宝、微信两大超级应用完成。门店内部空间局促，仅设有2张小圆桌，每张搭配两把椅子，整体面积仅为中国典型星巴克门店的五分之一，装修风格朴素甚至略显冷清。坐在不甚舒适的座椅上等待取餐时，你会看到店员们正马不停蹄地制作大量订单。柜台处始终摆放着10至20杯已制作完成的饮品，供顾客或配送员自取。饮品通常可在10分钟内完成，取餐即可离开。瑞幸的1万家门店中，99%都未提供可供休憩、社交或办公的“第三空间”（Third Place，星巴克提出的门店定位概念），更类似虚拟厨房（无堂食配送门店）。

欺诈指控后的发展历程
据顶尖股票研究平台信息，瑞幸的两名联合创始人曾制造中国存托凭证（American Depositary Receipts, ADR）历史上规模最大的欺诈案之一，最终被罢免。旧管理层被全面清退，新团队接手连锁咖啡业务的运营，仅现任CEO郭谨一博士例外——他也是瑞幸的联合创始人之一。最初我曾质疑任用另一位联合创始人担任高管的合理性，因其职业背景以学术研究为主。原因在于，在中国商业文化中，聘用外部CEO几乎是禁忌：几乎所有中国民营企业均由创始人亲自执掌。但郭博士更像是维系公司稳定的象征性精神领袖，因其仅持有公司1.3%的股份。事实上，整个管理团队合计持股仅3.4%，真正的控股股东是中国私募股权投资（Private Equity, PE）机构Centurium Capital(https://www.centurium.com/)。该机构于2021年通过可转换高级优先股对瑞幸进行投资，并于2022年收购了两名声名狼藉的创始人的全部股份。作为控股股东，Centurium Capital目前持有约33%的稀释后总股份，以及55.7%的投票权。
时至2023年，瑞幸已解决所有证券相关诉讼并支付了绝大多数罚款。最新季度的诉讼相关法律费用已降至60万美元，标志着瑞幸历史上最黑暗的时期已然结束。尽管瑞幸失去了投资者的信任，但在消费者眼中，其品牌并未遭受严重损害。新管理层关停了亏损门店，并以惊人的速度开设盈利新店。截至2023年第二季度，瑞幸的净门店数已突破1万家，在经历了多轮全域封控的艰难三年中实现了门店数量翻倍。月度活跃交易用户从2020年的660万飙升至2023年第二季度的4300万。2022年营收较2020年增长2倍，2023年上半年营收较2022年上半年增长超80%。过去六个季度中，除2022年第四季度外，瑞幸的同店销售额增速始终保持在20%以上。2022年第四季度全国遭遇历时最久、管控最严的封控时，瑞幸仍实现了近10%的增长。这无疑是一台高效的增长机器。且此次瑞幸的运营策略更为稳健：2023年第二季度的门店级营业利润率接近30%，GAAP净利润率达18.7%。

市场竞争
星巴克并非瑞幸的主要竞争对手。瑞幸48%的门店位于办公楼，12%位于校园；而星巴克的门店主要集中在高流量的购物中心区域。瑞幸聚焦外卖咖啡业务，而星巴克则主打为顾客提供“第三空间”体验。真正的竞争来自其他专注外卖咖啡与珍珠奶茶的连锁品牌。
在平价外卖咖啡赛道，规模效应能带来显著的竞争优势。通过批量采购原材料与设备获得的折扣，让瑞幸能够在与竞品的竞争中保持强劲的价格优势。阿拉比卡咖啡豆是全球供不应求的大宗商品。为降低咖啡豆进口成本，中国已在云南省种植本土阿拉比卡咖啡豆。瑞幸与星巴克等大型咖啡品牌均可通过直接与云南咖啡农场合作，以优惠价格采购原料。
瑞幸正在建设第二座顶级咖啡烘焙工厂，以实现所有咖啡豆的自主烘焙。这使得瑞幸成为除星巴克外，少数拥有大规模自主烘焙设施的咖啡品牌之一。这种垂直整合模式不仅省去了中间商成本，更确保了全系列咖啡产品的风味与品质稳定。最后，瑞幸庞大的配送体量使其能够获得比小型竞品更低的配送费率——中小连锁品牌无法与美团与阿里巴巴旗下饿了么主导的外卖双寡头议价。值得注意的是，瑞幸每杯咖啡仅收取3元配送费，远低于星巴克的6元（约1美元）。如果规模是瑞幸成功的关键，那么任何竞品都难以超越其规模优势。
我们可以看看快速扩张的竞品库迪咖啡（Cotti Coffee）。该品牌由瑞幸前述声名狼藉的联合创始人创立，截至7月底，库迪已拥有5000家门店，其中多数为加盟店。库迪复刻了瑞幸的运营策略，但其咖啡品质明显逊色：瑞幸的咖啡仍保留淡淡的咖啡风味，而库迪的饮品尝起来更像是加水稀释的甜牛奶。库迪曾试图以低于瑞幸的价格抢占市场，但瑞幸随即跟进调价，目前两家品牌的咖啡售价已基本持平。然而，在这场价格战中，瑞幸的门店仍能实现可观盈利，许多库迪加盟商却抱怨售卖库迪咖啡持续亏损。库迪的闭店率高得惊人，每月已达数百家。因此，即便竞品能够快速拓店，要像瑞幸一样实现盈利运营却困难得多。
另一方面，瑞幸的拓店策略极为审慎：在咖啡业务已被验证可行的一二线城市，瑞幸开设自营门店；而在市场尚未被验证但潜力巨大的低线城市，瑞幸则采用加盟模式。该品牌向加盟商提供开店所需的全部设备、软件与原材料，培训门店员工，并按门店总营收收取加盟费用。瑞幸借助品牌优势，以低风险、轻资本的方式渗透低线城市市场。

股权成本计算器、债务成本计算器、加权平均资本成本（Weighted Average Cost of Capital, WACC）计算器

核心竞品：珍珠奶茶
据维基百科数据，2020年估算显示，近年珍珠奶茶的消费量是咖啡的5倍。投资瑞幸，本质上也是押注咖啡市场的持续高增长，以及瑞幸能够抢占甚至夺取珍珠奶茶的市场份额。
珍珠奶茶通常由茶叶（多为红茶）、牛奶、糖浆与特殊配料珍珠粉圆制成。其消费群体主要集中在10至30岁的年轻人，但随着年龄增长，消费者会因饮品过甜、不健康而大幅减少饮用。相比之下，咖啡的受众群体要广泛得多。在瑞幸推出平价咖啡之前，咖啡因售价较高，客户群体规模小于珍珠奶茶。通常，珍珠奶茶在一二线城市售价为10至15元，在其他地区为5至7元，仅为星巴克咖啡售价的一小部分。但瑞幸让咖啡的价格具备了与珍珠奶茶竞争的实力。根据近期彭博社关于中国珍珠奶茶品牌IPO的报道，瑞幸已在极短时间内，以门店数量计成为咖啡与珍珠奶茶赛道的第二大连锁品牌。

估值分析
由于缺乏分析师覆盖且业绩电话会议中的问询有限，对瑞幸每股收益（Earnings Per Share, EPS）的估算存在一定难度。但考虑到2023年第二季度瑞幸每美国存托凭证（ADR）的收益为0.48美元，我认为保守预测下，未来12个月的每股收益至少可达2美元/ADR。该预测假设：季度净新增门店1000至1500家、同店销售额增速（Same-Store Sales Growth, SSSG）10%（瑞幸过去6个月的平均同店销售额增速超过20%），但增速会被当前的促销环境与淡季的低盈利能力部分抵消。
乐观情景下，瑞幸未来12个月的每股收益可达2.5美元/ADR。该假设基于季度新增5000家门店、同店销售额增速20%，预计2024年第二季度每股收益将翻倍至约1美元。2023年第三季度的高温天气将助力瑞幸销售高利润率的招牌冰饮，推动当季每股收益达到0.6至0.8美元/ADR。随后将迎来两个淡季，销量下滑，但可通过门店数量增长与同店销售额增速部分抵消。此外，瑞幸每ADR对应的净现金约为2.4美元。以当前股价计算，瑞幸的市盈率约为15倍往绩每股收益。对于一家未来营收与利润均有望快速增长的公司而言，这一估值水平极低。
显然，作为控股股东的盈利导向PE机构希望实现退出。我认为最佳的退出方式是将瑞幸在香港联合交易所重新上市。瑞幸启动港股上市仅为时间问题。