Luckin Coffee (LK)
“A good intention, with a bad approach, often leads to a poor result.” Thomas Edison
On January 31, Citron Research tweeted out a rapid response to a detailed short report alleging fraud in Luckin Coffee’s (LK) sales numbers.
Citron cited data from “Biz Con China," referring to Business Connect China (BCC), a Shanghai-based expert-network company that also sells data on listed, Chinese-domiciled companies. We managed to see a copy of BCC’s report, and right there in the first paragraph is written: “Based on BCC’s tracking, we are skeptical about some of Luckin’s reported figures.” The next paragraph begins: “Luckin’s reported figure of 444 items sold per day in 3Q19 is likely to be higher than their actual sales.” Citron seems to have missed this.
We know BCC to operate with a high degree of integrity but think the methodology used to collect the data was flawed. BCC itself warns clients that “we believe BCC’s tracking results portray the optimal situation that Luckin can reach.” Notably, BCC’s tracking results show lower numbers than LK management reports.
BCC tracked only 10 physical stores (0.3% of total physical stores) versus the 620 physical stores (18.1% of total physical stores) tracked in the Anonymous report. Further to this, 50% of the stores that BCC visited were "Relax stores" which make up only 4% of Luckin's total store count as of September 30, 2019. Relax stores on average have a 23% higher order volume than do other types of stores, according to BCC.
It's not all bad news. In several areas, BCC's data backed up the data in the Anonymous report. Citron conveniently forgot to mention that in the tweet.
Luckin has so far issued a blanket denial without providing confirmatory evidence. We are short Luckin and believe that the work of the anonymous short sellers was credible and complementary to our own analysis of the company’s reports.
Citron cited data from “Biz Con China," referring to Business Connect China (BCC), a Shanghai-based expert-network company that also sells data on listed, Chinese-domiciled companies. We managed to see a copy of BCC’s report, and right there in the first paragraph is written: “Based on BCC’s tracking, we are skeptical about some of Luckin’s reported figures.” The next paragraph begins: “Luckin’s reported figure of 444 items sold per day in 3Q19 is likely to be higher than their actual sales.” Citron seems to have missed this.
We know BCC to operate with a high degree of integrity but think the methodology used to collect the data was flawed. BCC itself warns clients that “we believe BCC’s tracking results portray the optimal situation that Luckin can reach.” Notably, BCC’s tracking results show lower numbers than LK management reports.
BCC tracked only 10 physical stores (0.3% of total physical stores) versus the 620 physical stores (18.1% of total physical stores) tracked in the Anonymous report. Further to this, 50% of the stores that BCC visited were "Relax stores" which make up only 4% of Luckin's total store count as of September 30, 2019. Relax stores on average have a 23% higher order volume than do other types of stores, according to BCC.
It's not all bad news. In several areas, BCC's data backed up the data in the Anonymous report. Citron conveniently forgot to mention that in the tweet.
Luckin has so far issued a blanket denial without providing confirmatory evidence. We are short Luckin and believe that the work of the anonymous short sellers was credible and complementary to our own analysis of the company’s reports.
