Sold out: post-fraud, triple bagger Luckin Coffee Inc ADR (OTC:LKNCY)

Bought 31 May 2022 at 10 USD

Sold 40% on 6 Febr 2023 at 27 USD 

Sold 60% on 16 Nov 2023 at 31.40 USD

At the time of my buy, the insiders responsible for doctoring the fraudulent sales figures were already identified, removed from the management team and in negotiations to sell their shares. Luckin was involved in several legal procedures to settle damages with early investors, who were disadvantaged by the stock price collapse after the fraud was exposed. To be frank, I have no legal background and did not fully understand all the procedures and documents involved. Every time a case was settled, another procedure was revealed, or some new legal milestone was mentioned. 

Yet, I could sense that a clean-up operation was ongoing, driven by the Chinese fund Centurium Capital, which also became the majority shareholder. Unfortunately, Centurium prefers to operate behind the scenes; there was (and still is) little information available about Centurium Capital and its intentions. The rapid development of the Luckin coffee business itself was much easier to observe. Although I do not speak Chinese, I was able to collect information about Luckin and its successes from online sources like Baidu Maps, YouTube clips, social media reviews and news articles. 

From the incomplete information and my anecdotal impressions, I concluded that the company was genuinely working on its come-back as a legitimate company. In addition to that, the coffee shop network was clearly growing at a fast pace. I decided to buy the share, which seemed cheap at 10 USD. Considering the risk that I was wrong and fraud was still ongoing, I limited the Luckin holding to a few percent of my total portfolio. Still anxious about fraud risks, I sold 40% on 6 Febr 2023 at 27 USD, which meant I secured the return of my initial investment.

I held my remaining Luckin shares for 1.5 years, during which my trust in Luckin's legitimacy increased. Two extensive research reports, Quo Vadis Capital, Inc. and Snow Lake, both recommending a buy, solidified my conviction. In May 2023, I visited the three Luckin outlets that were opened in Singapore at that point. I am not crazy about Luckin's signature coconut latte, but I enjoyed its Americano, brewed of beans from the Yirgacheffe, Ethiopia region. It is a lot better than Starbucks' Americano. (Which is not a high threshold, to be fair). However, neither Luckin's coffee nor the shop experience is exceptional in any way.

I sold out my remaining holdings last week. I noticed that some company insiders are selling their Luckin shares at an increasing scale and pace. 

Especially the selling done by Mr. Reinout Hendrik Schakel gave me pause for thought. In 2019, Luckin hired Schakel as CFO to manage the NASDAQ listing. During the recent Q3 2023 financial results presentation, Schakel announced that he will depart from the company at the end of 2023 for personal reasons. I have two concerns with this development:

1. Schakel's departure could be a sign that Luckin is not planning a relisting from the OTC market back to NASDAQ (or any other official market for that matter). It looks like Schakel concluded that, as the financial markets guy, he has no role left at Luckin. Or, to invert this observation, it would be very strange if Schakel left just before the company finally gets listed again.
2. Besides leaving the company, Schakel sold all his shares. As an insider with a corporate finance background, Schakel is obviously in a better position to value the Luckin stock than me. It looks like he believes that the share is currently overvalued. It also looks like he is not expecting any take-out offer on the shares from Centurium Capital. 

I usually avoid holding stocks in unregulated or lightly regulated markets like OTC. In Luckin's case, I was holding out for a relisting to an official market. After losing my confidence that this will happen any time soon, I see no other catalysts worthwhile waiting for. 

As in the case of my buy, I also made my sell on the basis of impressions and incomplete information. Luckin does not communicate any details besides the bare minimum required. There is just not enough information to go on. 

I applaud the current management team for running one of the fastest-growing businesses in the world. Luckin generates a lot of positive press with innovative marketing actions. Its customers love it. Should the company relist at an official exchange, I might be interested in buying the shares again. 

Disclosure: no positions in Luckin Coffee or Starbucks at the time of publishing this blog