So Luckin Coffee imploded, two months after the mysterious Muddy Waters report claiming massive fraud. Its share price dropped more than 80%. 

I take all the responsibility

According to Luckin, COO Jian Liu and a few employees fabricated CNY 2.2 billion (US$310 million) of sales from Q2 to Q4 2019. It can’t be more obvious that Liu, a long term loyal lieutenant of Chairman Lu Zhengyao, took the blame to protect others, almost surely in a joint decision. 

Funny thing is one day before the implosion, analysts were still predicting Luckin as a great buy after the Covid-19 crisis.

The following screenshot was taken from Google News immediately after the share price crash: 

Valid business model

Actually we think the business model of Luckin is fairly valid – whether it should reach its valuation before the implosion at such a fast speed is a question mark. 

Has it always been a fraud or has it gone down the same path as many other big implosions – where coverups after coverups snowballed to a point of no return? We do not know yet. 

There are many techniques of creating fake orders or fake sales volume in China, just ask anyone who has done the investigation before and you will hear tonnes of stories which you would previously never imagine. Certain fraud cases would be ingenious – we will share some next time. 

EY, Luckin’s auditors, was probably spared of responsibility – it did not and probably will not need to sign Luckin’s annual report. 

However, what immediately happened when Luckin outlets opened for business the next day, was a surge of orders. 

Why? Everyone wanted to enjoy their last cheap/free coffee by using their Luckin vouchers before the company goes down: 

Thanks for reading The Low Down (TLD), the blog by the team at Momentum Works. Got a different perspective or have a burning opinion to share? Let us know at hello@mworks.asia.

 

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