Bloomberg /Hong Kong
The fallout from Luckin Coffee Inc’s accounting scandal is spreading far beyond the high-flying Starbucks challenger, with renewed concerns about Chinese corporate governance dragging down stocks across industries and threatening to bring a halt to the country’s overseas initial public offerings.
The Xiamen-based coffee chain said on Thursday that its chief operating officer and some underlings may have fabricated billions of yuan in sales, upending what was supposed to be one of China’s best growth stories.
Luckin Coffee shares plunged as much as 81% in US trading and CAR Inc, a rental company founded by Luckin Coffee’s chairman, sank 54% in Hong Kong.
Popular short-selling targets including Anta Sports Products Ltd also slumped.
The revelations revived doubts about financial reporting that have for years dogged Chinese stocks listed in the US and Hong Kong, two exchanges frequently picked by company founders to raise new funds. While China recently changed regulations to punish instances of financial fraud onshore, the penalties remain negligible. Just last year, one of China’s largest listed drug makers said it overstated cash holdings by more than $4.3bn.
“After the Luckin incident, investors will be more careful when investing in Chinese companies that have a short founding history and rely on huge leverage to expand,” said Jackson Wong, Hong Kong-based asset management director for Amber Hill Capital Ltd. The news is likely to put at least a temporary freeze on new US listings by Chinese companies, according to four investment bankers who asked not to be identified because they aren’t authorized to speak to media.
One of the bankers said US investor appetite for Chinese shares already had waned amid a string of disappointing deals and heightened geopolitical tensions between Washington and Beijing.
Those concerns come on top of a general flight from risk because of the coronavirus pandemic, which has caused IPO volumes globally to plunge in recent weeks. “It will inevitably affect the investors’ confidence and market momentum on other US-listed China stocks,” said Steven Leung, executive director at UOB Kay Hian in Hong Kong. “It may even affect the Chinese companies’ US IPO pipeline because investors would start to question their accountability.” Louis Tse, Hong Kong-based managing director at VC Asset Management Ltd, disagreed, saying all IPOs have to follow the same procedures and meet the same regulatory requirements.
“I don’t think this will tarnish the names of incoming companies in Nasdaq,” he said. “Psychologically it would have an impact, but it’s not necessarily on a Chinese company.”
Outside the Luckin Coffee corporate family, the sell-off yesterday hit companies previously called out by speculators for their financial reporting – including Anta Sports Products Ltd, Xtep International Holdings Ltd and 361 Degrees International Ltd.
China International Capital Corp, one of the lead managers of Luckin Coffee’s IPO last year, slid as much as 5.4% in Hong Kong.
Luckin Coffee suspended Chief Operating Officer Jian Liu and others while its board investigates, and it said investors shouldn’t rely on previous financial statements for the nine months ended September 30. The transactions in question occurred last year and totalled about 2.2bn yuan ($310mn), according to its filing.
If true, the fabricated sales figure could represent a significant portion of the company’s total revenue. Luckin, which has only reported financial data for the second and third quarter of last year after its May public offering, was seen reporting 5.15bn yuan of revenue for the full year, according to the average of estimates compiled by Bloomberg.
“Certain costs and expenses were also substantially inflated by fabricated transactions during this period,” Luckin said, adding that the board hasn’t verified the fabricated sales figures.
Thursday’s share decline erased what had been a 54% gain since the company went public last year.
The coffee chain, founded in 2017, operated about 4,500 stores by the end of 2019 in China.
Chairman Lu Zhengyao and chief executive officer Qian Zhiya employed a strategy they used with CAR Inc more than a decade ago: burning money from investors to quickly grab market share from rivals.
That strategy has been successful in winning over investors.
Luckin Coffee planned to reach 10,000 locations by the end of next year in a market valued at $5.8bn.
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