China's Luckin Coffee slumps on 'fake' data news

Cornelia Mascio
Aprile 3, 2020

Remember when Luckin Coffee was growing at such an exponential rate in China that it was putting Starbucks on its heels?

Luckin said the investigation had found that fabricated sales from the second quarter of 2019 to the fourth were about 2.2 billion yuan ($310m). That equates to about 40% of its estimated annual sales. That would be about 41% of the $759 million the company was estimated to have generated in sales previous year, according to information from financial services site Sentieo.

The Beijing-based company, which opened its first location in 2017 and had 4,500 units by the end of 2019, said it has formed a special committee of its board to oversee an internal investigation over issues discovered during an audit of its financial statements from a year ago.

The company, listed on the USA technology-heavy Nasdaq board, suspended COO Jian Liu and employees reporting to him following initial recommendations from a special committee, which was appointed to investigate issues in its financial statements for the fiscal year which ended on December 31, 2019.

Luckin's shares ended Thursday's trading session down by more than 75% at $6.40 after hitting a record low of $4.90 earlier in the day.

Luckin said that, in addition to the fabricated sales, certain costs and expenses were also inflated. The committee hasn't independently verified its estimate on the fabrication. "This is again a wake-up call for United States policymakers, regulators, and investors about the extreme fraud risk China-based companies pose to our markets", Muddy Waters said in an emailed statement on Thursday. "As a result, investors should no longer rely on the company's previous financial statements and earnings for the nine months ended September 20 and the two quarters starting April 1, 2019, and September 30, 2019".

Earlier this year the high-profile short-seller Muddy Waters Research started betting against the company's shares, citing a report that alleged that Luckin had fabricated financial and operating figures from the third quarter of last year. The investment firm called it "a fundamentally broken business that was attempting to instill the culture of drinking coffee into Chinese consumers through cutthroat discounts and free giveaway coffee".

Liu has been the COO of the company since May 2018.

At the time, Luckin strongly denied the allegations, describing them as "misleading and false".

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