After it was forced to withdraw from the Nasdaq for an accounting fraud, China's Luckin Coffee believes it has emerged from its darkest moment and remains committed to the U.S. capital markets as it expands its stores and sales.
Luckin admitted in 2020 that almost $310 million of its sales were fabricated in the previous three quarters, bringing the coffee maker to the brink of collapse after having blazed a trail as a homegrown challenger to U.S. coffee giant Starbucks.
The company was facing a huge crisis at the time that David Li, chairman and chief executive of Chinese private equity firm Centurium Capital, told Reuters that he was referring to accounting fraud.
Luckin was out of Nasdaq after the financial scandal, shocking Wall Street investors. After changes in ownership and top management, as well as paying hundreds of millions of dollars in fines, the company is flexing its muscles.
A turnaround for Luckin would vindicate the company's top management and new owners, who have continued to push the chain to expand in China's highly competitive coffee market.
Luckin reported its first quarterly operating profit in May. It reported a 72 per cent increase in net revenue for the June quarter. In comparison, Starbucks said last week its third quarter comparable sales in China fell 44 per cent.
Centurium, a key early investor in the coffee chain, became the firm's controlling shareholder in January after leading a consortium to acquire shares that used to be owned by two of Luckin's founders for more than $400 million.
Centurium sent seven of its staff to work with Luckin's management team for months in the aftermath of the fraud and poured $240 million into the business in the following year to finance its restructuring.
It has pushed Luckin to rebuild a more transparent and connected database to make sure there are no data silos that Li blamed for the accounting scandal.
Luckin intends to open new stores, said Luckin's chief executive Guo Jinyi, even though China's stringent COVID 19 curbs have forced many catering chains to be cautious about expansion in the near-term.
Luckin said he would add more outlets across the country, including in the top-tier cities such as Beijing and Shanghai.
Luckin, founded five years ago, currently has nearly 7,200 shops in China, compared to Starbucks' 5,761 by early July.
Guo said that the potential of the Chinese market remains huge, because more than 5,000 of the stores are located in 50 to 60 major cities, even though Luckin has reached 230 Chinese cities.
Since the delisting of Nasdaq, Luckin remains tradable via a pink sheet, off-exchange trading platform that mainly involves penny-stock companies that do not meet the main exchanges' listing standards.
On Monday Reinout Hendrik Schakel, who left his chief financial officer role but remains the chief strategy officer, told analysts the company remained committed to the U.S. markets.
Guo said we don't have a timetable yet, but Guo said we're talking about a possible Nasdaq return. We haven't considered re-listing in other markets, but we will continue to pay attention to the U.S. capital market. The U.S. coffee chain is still the dominant player in 2021, down from the previous year's 31.2 per cent, according to Euromonitor, although Luckin is ahead of Starbucks in China's store numbers.
Luckin's market share rose to 7.8 per cent last year, from 6.3 per cent in 2020.
Asked how Luckin intends to restore investors' confidence, Guo said: "We can only rely on Luckin's business performance, and we need to rely on issuing strong quarterly, annual reports to restore confidence."