“Cheat on me once, shame on you. Cheat on me twice, shame on me.”
This is a very relevant sentence for Cafe Luckinof (OTC: LKNC.Y) former, current and future potential investors who may consider this action. The besieged Chinese coffeeshop chain was delisted from the U.S. stock exchanges in June 2020 after discovering that the previous management had made more than $ 300 million in sales and inflated spending to cover it.
Now the company has filed for Chapter 15 bankruptcy protection and replaced its management team. For the stores it has in operation, sales are growing again at double-digit rates.
Is It Time To Buy Luckin Coffee Again? Let’s dig a little deeper to find out.
What does Chapter 15 bankruptcy mean for investors?
Chapter 15 is a section of the bankruptcy code covering insolvency cases involving companies with assets in more than one country. Luckin Coffee, which is domiciled in the Cayman Islands and does most of its business in China, applied for this protection in early February to guard against lawsuits from US creditors. The move follows his December 2020 deal to pay the SEC a $ 180 million fine to settle the fraud allegations.
In most cases, filing for bankruptcy is the death knell for shareholders. But for Luckin, most of the drop seems already taken into account. Shares are down about 85% from their 52-week high of $ 43 per share in January 2020. And while other downsides are possible, management plans to keep the company in business.
They state the following in a recent press release:
The Company is negotiating with its stakeholders to restructure financial obligations, to strengthen the balance sheet and enable it to exit Cayman proceedings as a going concern.
The company is still growing
According to management, Luckin’s bankruptcy filing will not affect day-to-day operations and all of its stores in China remain open. As the company faces persistent uncertainty due to drama c-suite, numerous lawsuits and investigations, its operational performance will likely determine which direction the stock is heading in the long run.
Luckin Coffee’s last earnings report dates back to November 13, which covers the third quarter of 2019. However, on December 17, the company’s bankruptcy liquidator submitted an unaudited report to the Cayman Islands Grand Court that reveals updated financial information.
Third-quarter revenue jumped 36% to 1.1 billion yuan ($ 171 million), following a 50% growth in the second quarter to 980 million yuan ($ 152 million) ).
Luckin streamlined operations – moving from a “growth at any cost” business model to more focused expansion. Management conducted store performance reviews and closed underperforming locations. It has also strengthened its criteria for opening new stores, targeting areas with better growth potential. Luckin now reports 3,898 standalone stores in November 2020, up from 4,511 in March.
Luckin coffee stock is on hold
The bankruptcy of Luckin Coffee paved the way for the restructuring of the company. And his rapid growth rate increases the likelihood that this beleaguered coffeeshop can turn into a viable business when the dust settles. However, investors may want to wait until the end of bankruptcy proceedings before taking a position. Due to his sleazy track record and heightened suspicion about Chinese stocks in general, investors should also expect Luckin Coffee to trade at a discount even as his financial situation improves.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.