We wrote earlier about the scandal that had hit Luckin, but we’re only now learning the details behind one of the biggest accounting scandals in our industry that has seen shareholders potentially lose their entire investment.
You might think Luckin Coffee is a Coffee company, but you’d be wrong – no, it’s a consumer technology business. At least this is how they presented themselves to the stock market, which understands that tech companies build revenues with fast growth, but often lacking any profit in their initial years.
Their cashless stores provided an explanation for this positioning and allowed Luckin to tap into investors appetite for high growth potential technology stocks, rather than the comparatively mundane retail market.
Luckin did experience stellar growth for a while but those revenues, it turns out, evaporated once the lid was taken off.
Luckin announced they had uncovered fraud worth hundreds of millions of dollars, in which the company had fabricated sales. It will probably be some months before the investigations are completed and we learn the details, but their share price which peaked just in January 2020 at $50, was halted on April 7th pending ‘news’.
The first news the market received was that Goldman Sachs – a US Investment Bank had executed a ‘Margin Call’. Margins are a way of borrowing money using the company stock you hold as collateral to secure the debt. Goldman Sachs had extended a $500m loan to the family trust that owned the majority shares in Luckin. By executing the margin call, Goldman suddenly seized a massive percentage of the outstanding shares to pay off the loan.
The halt in trading extended day by day, giving other shareholders no opportunity to trade their shares – or sell to get some money back. It’s likely that Luckin will start trading again, but the road ahead for them is far from certain. Meanwhile, Starbucks share price has jumped on the news with investors considering the competition in China suddenly got a lot easier for the Seattle based company.
