Chinese coffee chain Luckin Coffee Inc. filed for Chapter 15 bankruptcy in New York, less than a year after the company was forced to admit that it fabricated millions of dollars in receipts.
The move will enable the company to hold off lawsuits by U.S. creditors and bondholders who are owed $460 million. The bankruptcy laws will allow Luckin to continue trading, which in fact is doing with more success than previously.
Touted as a Starbucks competitor, Luckin chose to follow a strategy that maximised money to its nefarious Chairman, Charles Lu. Lu and his cronies not only oversaw the fabrication of sales, but we have now learned that he also lent money raised from Luckin’s investors to one of his other businesses – Hong Kong listed UCAR.
The loan was secured against receivables and stock, but as with all things associated with Lu, this cannot be taken at face value. The deal was not what they say ‘an arms length’ transaction – meaning there was a clear conflict of interest. Luckin has recently called in the loans, and to nobody’s surprise, UCAR said it was unable to pay. This could add another $185m of losses the shareholders will have to shoulder.
The company continues to meet its trade obligations in the ordinary course of business, including paying suppliers, vendors and employees. – Luckin said in a statement
Luckin asked a federal judge in Manhattan time to allow it to restructure its finances via a court case filed in the Cayman Islands, where the company is incorporated. Those procedures have already started and will try to find a path that allows the company to continue to trade, while satisfying shareholders, creditors and bondholders.
Interestingly the company appears to be making sensible commercial decisions over the previous year. They have increased the number of franchised outlets, which reduces the need for lots of capital – effectively putting the burden of up front investment into the hands of franchises. These stores now represent 23% of the companies 4,792 number of outlets.
Luckin’s management are slowing down growth. September 2020 YoY growth was recorded as 23.1% vs 37.3% in June 2020. Although still rapid, this is a far more sustainable level, and will allow Luckin to keep precious cash reserves. In combination with this, the company has closed non-performing stores, so the growth is happening despite a programme of closures.
The company’s fraud has led to calls of increased scrutiny of Chinese companies that sell shares on U.S. exchanges. Some calling for an outright ban on Chinese companies listing in US markets. The concerns for global investors are that China’s corporate governance model and regulation is too immature and lenient to be trusted by US investors.