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Delisted for fraud, Luckin Coffee seeks return to Nasdaq

By Daniel Tyson

19:53, 21 January 2022

Luckin Coffee on Nasdaq board
Luckin Coffee brought in new management and has seen store sales growth - Photo: Shutterstock

Chinese coffee chain Luckin Coffee has plans to return to the US stock market after a delisting nearly two years ago for fabricating sales figures and committing $300m in accounting fraud, which resulted in a US lawsuit.

After meeting with investors and advisors to consider options for raising capital, Luckin Coffee could relist on the Nasdaq as early as the end of 2022, when it exits bankruptcy, accord to news reports.

Since being delisted, the company has brought in new management and has seen recent growth in store sales.

Luckin reports over-the-counter earnings trade, and a relisting on Nasdaq could present fewer regulatory roadblocks compared to a traditional IPO process.

Regulatory scrutiny of Chinese companies seeking to go public in the US has been rising, with proposed legislation requiring said companies to be audited by American companies.

Hot brew in China

The coffee chain is currently one of the best-performing Chinese stocks. On Friday, Luckin Coffee, ticker LKNCY on the Chinese stock exchange, surged 19% in afternoon trading. Earlier trading showed the stock soaring more than 25%.

Luckin reported Q3 2021 revenue jumping 106% to $370m, though the strong growth can likely be attributed to a decline in year-ago sales during the first year of the Covid-19 pandemic. Luckin operates 5,671 stores, about 500 more stores than Starbucks operates in China, according to various reports.

Shares of Luckin Coffee trade over the counter with a $2.5bn valuation. The coffee chain saw its valuation peak at around $13bn in early 2020.

Since entering bankruptcy, Luckin has restructured debts, paid down SEC fines and appointed a new financial team.

However, some believe Luckin is still has problems.

DE40

18,523.90 Price
-0.090% 1D Chg, %
Long position overnight fee -0.0221%
Short position overnight fee -0.0001%
Overnight fee time 21:00 (UTC)
Spread 1.5

HK50

16,644.20 Price
+0.930% 1D Chg, %
Long position overnight fee -0.0233%
Short position overnight fee 0.0014%
Overnight fee time 21:00 (UTC)
Spread 30.0

J225

40,356.50 Price
-0.400% 1D Chg, %
Long position overnight fee -0.0110%
Short position overnight fee -0.0112%
Overnight fee time 21:00 (UTC)
Spread 10.0

US30

39,831.40 Price
+0.140% 1D Chg, %
Long position overnight fee -0.0262%
Short position overnight fee 0.0040%
Overnight fee time 21:00 (UTC)
Spread 2.2

“Revenues rising sharply is something that those of us who have been following Luckin have seen before,” Michael Norris, an analyst at consultancy AgencyChina who has questioned the company’s business since its 2019 IPO, told The Financial Times.

Dubious deeds

Luckin was delisted from the Nasdaq stock exchange in June 2020. Six months later, the company agreed to $175m in penalties to settle the accounting fraud charges with the US Securities and Exchange Commission.

In October 2021, Luckin reached a settlement in a $175m class-action lawsuit with investors alleging inflated shares and revenues.

Luckin agreed to pay the negotiated amount by June 2022 in exchange for release of all claims. The deal required approval by Chinese authorities and liquidators in the Cayman Islands. The company filed liquidation proceedings before the Grand Court of the Cayman Islands and a related C bankruptcy proceeding in the US to recognise actions by the Cayman Islands’ court.

Luckin Coffee officials and company underwriters raised $645m during its 2019 initial public offering and later offered American depositary shares, negotiable certificates of a non-US company deposited in a foreign bank. The US government estimates Luckin raised $864m from debt and equity investors during the multiple-month fraud.

Reports state the coffee company trades approximately 75% below its 2020 peak, an attractive investment for those seeking value in today’s pricey market.

SEC warning

Luckin helped bolster the SEC’s argument for extra scrutiny paid to Chinese businesses issuing securities in the US. Certain industries are prohibited by China to sell ownership in their businesses to foreigners.

“As a workaround, they use structures called variable interest entities to raise capital on US exchanges through shell companies in the Cayman Islands and other jurisdictions. We are working to ensure that the heightened risks related to these structures and other risks related to operating in China are clearly and prominently disclosed to investors,” said SEC chair Gary Gensler before the Senate Committee on Banking, Housing and Urban Affairs in September 2021.

Since then, Chinese companies listed on US exchanges have also seen pressure from authorities in Beijing. Most notably the data security concerns resulting in the botched IPO of ride-hailing company Didi, which also delisted its stock from the New York Stock Exchange six months after its listing, and then relisted in Hong Kong.

Read more: China's Luckin Coffee settles shareholder lawsuit

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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