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Thursday, April 2, 2020

-=Luckin Coffee (LK) plummet 80% after investigation finds COO fabricated sales

  • Luckin Coffee disclosed that an internal investigation has found that its chief operating officer fabricated 2019 sales.
  • Muddy Waters Research said in January that it bet against the stock in light of what it described as fraud and a “fundamentally broken business.”

Luckin's preliminary internal investigation unearthed that COO Jian Liu and several employees reporting to him fabricated $310 million in transactions through the final nine months of 2019. Costs and expenses were also inflated substantially. Investors thought that they were buying into the Starbucks (NASDAQ:SBUX) of China, but now it's looking more like the Enron of China.

Luckin Coffee isn't Starbucks. It offers small kiosks that lean largely on mobile order and cashless transactions. The locations are cheap to set up and can be staffed lightly, designed for a high volume of low-ticket purchases. It seemed like the perfect way to disrupt Starbucks' takeover of China: betting on mobile-savvy consumers who would lean on the app and canvassing the country with more locations to make things even easier. Luckin seemed to be doing things right in giving China a hometown hero it could root for, and the number of average monthly customers had soared nearly fivefold to 9.3 million in the 12 months ending in September. It had launched Luckin Tea as an independent brand to cash in on China's iconic warm beverage of choice. Now, Luckin is a cautionary tale that will sting the next hot Chinese growth stock with numbers that seem too good to be true.

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