As I mentioned in yesterday’s issue, we got some bad news on Luckin Coffee (LK) before the market opened regarding an internal investigation of fraud by the company’s COO and several other employees who apparently significantly overstated sales in 2019.
Luckin Coffee had been a winner for us, trading as high as 50, and I’m hoping that most subscribers sold some of their stock earlier as I recommended in a number of previous issues.
What to do now if you have a position in LK?
The uncertainty is high but I would not sell at the current price of 6.40.
As of last quarter, Luckin claimed to have $775 million in cash, which amounts to $3/share, which means the enterprise is selling for less than a billion dollars ex-cash.
There’s also a chance that some buyer would appear for the company on the basis that the brand and existing store base is worth taking on at a relatively modest price.
No doubt this fiasco put a bit of a cloud on all Chinese stocks. We have four in the portfolio right now. Ping An (PNGAY) and Alibaba (BABA) are very solid names while LexinFintech (LX) is a more aggressive idea so I’m going to reassess the story as a precaution.
Here is part of Luckin’s SEC filing describing the wrongdoing:
“The Special Committee today brought to the attention of the Board information indicating that, beginning in the second quarter of 2019, Mr. Jian Liu, the chief operating officer and a director of the Company, and several employees reporting to him, had engaged in certain misconduct, including fabricating certain transactions. The Special Committee recommended certain interim remedial measures, including the suspension of Mr. Jian Liu and such employees implicated in the misconduct and the suspension and termination of contracts and dealings with the parties involved in the identified fabricated transactions.”