Updated: May 16, 2020
UPDATE (4/3/2020): We exited our position for a quick >30% return. LK shares stopped trading later that week. We are happy we took advantage of the dead-cat bounce and exited our position quickly.
Hi all, we just completed a quick diligence on Luckin Coffee (LK). For those who missed the message earlier in the day, LK's COO falsified $310M in transactions.
After our diligence, we do NOT believe it is a good purchase for the following reasons:
LK falsified nearly 50% of its 2019 revenue. LK's COO falsified $310M of LK's $732M 2019 revenue. This means the stock price should have at least been cut by 50%, assuming expenses stay the same and were not falsified.
LK will need to respond to shareholders. LK was founded in 2017 and scaled to a $10B company in 3 years. Because of this fast growth, it's a highly coveted company with significant investments (think SBUX). Several class action lawsuits have started to represent the sea of shareholders who were impacted by this fraud.
The combination of this scandal and COVID-19 may be deadly for LK. Given less than reported revenue and a significant decrease in traffic due to COVID-19, LK is in a precarious situation. Endless lawsuits and cases will also drag down the company's value.
We purchased 50 shares of LK @ $5.25 and made ~30% return in one day. However, we do not expect to hold this position for more than a few days. We took this position to get skin in LK in case there was a quick and significant bounce back while we did research. After conducting the diligence, we will likely sell our shares tomorrow.
UPDATE: LK halted trading at $4.39 one day after we exited from the position.