Luckin Coffee Could Stumble When IPO Lockup Expires (OTCMKTS:LKNCY)

12.66K Followers

Summary

When the IPO lockup period for Luckin Coffee expires on November 13th, pre-IPO shareholders and company insiders will be able to sell a large blocks of currently-restricted shares.
Significant sales of currently-restricted stock could flood the secondary market when the lockup expires and cause a sharp, short-term downturn in share price.
With a more than 10% return from IPO, pre-IPO shareholders and company insiders could be looking to cash in on gains.
Aggressive, risk-tolerant investors should consider shorting shares of LK ahead of the IPO lockup expiration.
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When the lockup period for Luckin Coffee (LK) ends on November 13th, its pre-IPO shareholders will have the opportunity to sell large blocks of currently-restricted shares.

(Source: S-1/A)

Just 14.2% of LK's outstanding shares are trading pursuant to the IPO, so there could be a large increase in trading volume when the lockup expires. Significant sales of currently restricted shares could flood the secondary market when the LK IPO lockup expires causing a sharp, short-term downturn in LK's share price. Aggressive, risk-tolerant investors should consider shorting shares of LK ahead of the company's lockup expiration.

Business Overview: Retail Coffee Brewer in China

Luckin Coffee is the second largest retail coffee brewer in China in terms of cups of coffee sold and the number of retail outlets. Founded in 2017, Luckin Coffee uses a new retail model that embraces technology to provide its customers with affordable, convenient, and high-quality coffee drinks.

(Source: LK company website)

The company uses its mobile apps to handle the entire customer order and purchasing process. This gives their coffee drinkers a 100% cashier-less experience. In addition, Luckin Coffee notes that it improves their operational efficiency and promotes customer engagement.

The company operates three types of retail outlets. However, as part of the strategy, they focus on outlets called pick-up stores. These outlets have limited seating, and the company locates them in areas that are known for high coffee demand such as university campuses, office buildings, and other commercial areas.

Customers must use the mobile app to order coffee. They select either pick up or delivery and pay online after ordering. A text message is sent to the customer when the coffee drink is ready - typically about three minutes. Delivery takes approximately 30 minutes.

In addition to focusing on using technology to drive the customer experience, the company strives to maintain a high quality of coffee. Their SEC filings note that their coffee won the gold medal in the 2018 IIAC International Coffee Tasting competition.

In the 18 months since launching, Luckin Coffee has gone from one trial outlet in Beijing to 2,963 retail stores across 28 cities in China as of June 30. It has sold over 90 million cups of coffee to more than 16.8 million customers. Their customer repurchase rate is over 54%. In its efforts to surpass Starbucks as the top coffee drink retailer, Luckin Coffee expects to have 4,500 outlets throughout China by the end of 2019. Currently, Starbucks has approximately 3,600 stores, which took them 20 years to open.

Company information was sourced from the firm's S-1/A and company website.

Financial Highlights

Luckin Coffee Inc. reported second-quarter financial highlights for the period ending June 30, 2019:

Total net revenues were RMB870.0 million (US$126.7 million), for an increase of 698.4% versus the same quarter last year.
Cumulative number of transacting customers grew to 22.8 million, up from only 2.9 million the same period last year.
Luckin Coffee added 5.9 million new customers for the second quarter of 2019.
Average monthly items sold increased by 589.7% for the second quarter of 2019 versus the same period last year.
The total number of retail outlets was 2,963 for an increase of 374.8%
Luckin Coffee trimmed its store operating loss to RMB55.8 million (US$8.1 million), versus a loss of RMB81.7 million for the same period last year.

Financial results were sourced from the company's website.

Management

CEO and Director Jenny Zhiya Qian has served in her position since November 2017. She previously served in senior positions at UCAR. She holds a bachelor’s degree from Wuhan Institute of Textile Science. She holds an MBA from Peking University.

COO Jian Liu has served the company since May 2018. He previously held senior positions at UCAR. He earned a bachelor’s degree from the Central University of Finance and Economics.

Management info was sourced from the company's website.

Competition: Starbucks, McDonald’s, and KFC

As noted, Luckin Coffee is currently the second largest coffee drink retailer in China. Starbucks (SBUX) holds the top position. Other fast food restaurants pose competition to Luckin Coffee including McDonald’s (MCD), KFC, FamilyMart, Coffee Box, and other Chinese fast food restaurants.

Early Market Performance

The underwriters priced the IPO at $17 per share. The stock closed on the first day of trading at $20.38 for an increase of 19.9%. Shares dipped to $14.75 on May 22. Then, they began to climb to reach a high of $26.58 on July 29. LK currently has a return from IPO of 10.4%.

Conclusion

When the Luckin Coffee IPO lockup expires on November 13th, pre-IPO shareholders and company insiders will be allowed to cash in on their gains and sell large blocks of currently-restricted shares for the first time. With just 14.2% of LK's outstanding shares trading pursuant to the IPO, there is a significant chance that trading volume could dramatically increase when the lockup expires. Significant sales of currently-restricted shares could flood the secondary market and push LK's share price sharply lower in the short term.

LK's pre-IPO shareholders and company insiders include numerous directors and VC firms.

(Source: S-1/A)

Aggressive, risk-tolerant investors should consider shorting shares of LK ahead of the firm's IPO lockup expiration on November 13th. Interested investors should cover shares of LK during the November 14th and November 15th trading sessions.

Interested in learning more about IPO Lockup investment opportunities? Check out our subscription service, IPO Insights. We update subscribers with actionable investment opportunities that follow the debut of select companies on U.S. exchanges.

This article was written by

Don Dion

12.66K Followers

Don Dion is the CEO of Inland Management, a company focused on acquiring, subdividing, developing and marketing large tracts of land on the fringes of major metropolitan markets. Inland Management has sold land in all 48 contiguous states totaling billions of dollars. As CEO, Don is responsible for helping to maintain and enhance the firm’s strong financial position and identifying opportunities for growth. In addition to his role at Inland Management, Don Dion is the Chief Investment Officer of DRD Investments, LLC. Based in Naples, FL. and Williamstown, MA., DRD Investments is a family office focused on managing a long/short hedge fund, real estate, venture capital and various other financial assets for the Dion family. Don also serves as the trustee of the Dion Family Foundation, which focuses on helping individuals with tuition assistance at Catholic Institutions for grammar school, high school, and college education. The foundation also helps individuals by supporting Massachusetts General Hospital. Don is on two leadership boards and advisory committees at Massachusetts General Hospital and the Home Base Program (a partnership between Mass General and the Red Sox Foundation). He consults with Saint Dominic's Academy and serves as a trustee of Saint Michael’s College. Previously, Don was the founder and CEO of Dion Money Management, a fee-based investment advisory firm for affluent individuals, families and non-profit organizations. Founded in 1996 and based in Williamstown, MA. and Naples, FL., Dion Money Management managed approximately one billion in assets for clients in 49 states and 11 countries. While at Dion Money Management, Don was responsible for setting investment policy, creating custom portfolios, and overseeing the performance of client accounts. Don sold the firm to NYC-based Focus Financial Partners (FOCS) on September 1, 2007 and no longer manages money for other families or institutions. Don remains a shareholder of Focus Financial Partners (FOCS). Don is also the retired publisher of the Fidelity Independent Adviser family of newsletters, which provided a broad range of investor commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With nearly 100 thousand subscribers in the United States and 29 other countries, Fidelity Independent Adviser published two monthly newsletters and one weekly newsletter. The flagship publication, Fidelity Independent Adviser, was published monthly for 16 years and reached over 60,000 subscribers. In 2011 Don and his daughter Carolyn co-authored the Ultimate Guide to ETFs, available on Amazon.com. Prior to founding Dion Money Management, Don co-founded Litchfield Financial Corp. (LTCH) with Summit Partners. Don served as Chairman and CEO of Litchfield, which was listed on the Nasdaq in 1992 and acquired by Textron Corp. (TXT) in 1999. Don was also the Executive Vice President, CFO and General Counsel for Patten Corporation (BGX) from 1986 to 1988, where he played a critical role in the company’s successful initial public offering on the New York Stock Exchange. From 1983 to 1985, Don was a corporate lawyer with the Boston Law Firm of Warner and Stackpole. Before joining Warner and Stackpole, Don worked as a C.P.A. for Ernst and Young from 1979 to 1983. Don graduated with honors from Saint Michael’s College in 1976 with a B.S. degree in Economics and Business Administration. He received his J.D. from the University of Maine Law School in 1979 and his LL.M. from Boston University Law School in 1982. Don can be reached at donalddion@gmail.com

Analyst’s Disclosure: I am/we are short LK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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