In this video we explain the Luckin Coffee fraud. Luckin Coffee is a Chinese premium coffee chain. It IPOed on the US stock market in 2019 and reached a valuation of $9 billion at the peak. However, it turned out a large portion of their revenue was fake. They were exposed as a fraud in early 2020 and delisted from the NASDAQ.
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Join our free Discord Server: https://discord.gg/VBd6cA4jUt
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Music courtesy of:
––––––––––––––––––––––––––––––
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Creative Commons — Attribution-ShareAlike 3.0 Unported — CC BY-SA 3.0
Free Download / Stream: http://bit.ly/2Pe7mBN
Music promoted by Audio Library https://youtu.be/b6jK2t3lcRs
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What's up guys and welcome back to wall street millennial, many investors buy foreign stocks for the purposes of portfolio diversification in particular, chinese companies have become popular as people want to own a piece of the world's second largest economy, with the u.s stock market being the biggest In the world, new chinese companies are ipointing on major u.s exchanges on almost a weekly basis. The new york stock exchange expects 60 chinese ipos in 2021 alone. However, investors must be especially cautious about chinese listings. The chinese government is notoriously relaxed in regulating their company's accounting standards, and the country has far more than its fair share of fraudulent companies in this video.
We're going to be taking a look at one of the most blatant examples of chinese fraud that was exposed. Just one year ago, in 2020, we're talking about none other than the now bankrupt. Looking coffee throughout the 2010s starbucks was growing rapidly within china. The market was rapidly expanding and it became clear that there was tremendous amounts of money to be made in the chinese premium.
Coffee segment: in 2017, two chinese entrepreneurs, jenny, chan and charles liu decide to make their own coffee company to compete with starbucks. They opened their first store in january of 2018.. They made a premium customer experience with the interior of the store having a sleek and modern design similar to that of starbucks. Their key differentiator was their focus on technology.
The stores didn't accept cash and customers could only pay with the luck and coffee app customers could order on the app ahead of time and pick up their coffee as soon as they arrive at the store. They also claim to use artificial intelligence to pick the best locations for new stores, optimize pricing and perform supply chain forecasting in july of 2018, just a half year after opening their first store. They raised 200 million dollars from investors, including the sovereign wealth fund of singapore. They used this money to advertise aggressively, hiring celebrity promoters and posting digital advertisements throughout chinese media channels.
They also use aggressive discounting to lure customers. New customers received a voucher for a free drink whenever they signed up on the app their marketing strategies seemed to have been working well, as it allowed them to grow rapidly. In october of 2018, they opened their 1300 store, making them the second biggest coffee company. In the country, second, only to starbucks in january of 2019, they had 2 500 stores and looked to be on track to surpass starbucks within just a few years.
They raised an additional 150 million dollars from institutional investors, including blackrock, which they would use to open, more stores by the middle of 2019. They had a compelling story to tell investors, besides their savvy marketing. They also developed new technologies such as automated coffee kiosks. They had developed a strong brand and became the number two coffee company in less than three years. They took this investment story to the u.s, where they ipo'd on the nasdaq for dollars per share under the ticker symbol lk. This gave them a valuation of 2.9 billion dollars, notably this was the first time since the tech bubble of the late 90s, where a company achieved a 3 billion valuation in less than 3 years after being established, the ipo was quite successful in the third quarter of 2019, the company reported a nearly 400 percent growth in customer traffic, while their aggressive advertising caused them to post net losses. They claimed their profitability on a per store basis was rapidly increasing. In light of the bullish news, the stock peaked at over 50 dollars per share.
In january of 2020, giving the company a valuation of 9 billion, however, not everyone was buying. Looking coffee's success story. On january 31st, 2020, the short selling firm, muddy waters tweeted a link to an anonymous 89-page report. The report alleged that the company had artificially inflated their profits by up to 88 percent.
The author of the report said that they hired hundreds of people within china to conduct over 10 000 hours of video surveillance based on how many people entered each luxem store every day and how many items the average customer bought. They made an estimate for how much revenue each store, and thus the entire company was making looking was reporting revenue of 88 higher than the estimates that they made. Based on the video evidence from this, they concluded that looking was fraudulently inflating their sales to push up the stock price and raise money from unsuspecting investors based on third party advertising data. They also found that looking coffee inflated their advertising expense by 150 percent.
It might seem weird that a company would inflate their expenses as this decreases profitability. However, at the time investors didn't care about net profit and as long as revenue was growing, the stock could continue to rise inflating the advertising expense, helped them explain why their cash reserves were declining, despite the fact that they are supposedly making so much revenue. Lucky coffee vigorously denied the allegations they claimed that the report was malicious and the authors did not understand the company's business model in operating environment. To clear up the controversy they announced an internal investigation to prove their reported.
Financials were legitimate since the short report was anonymous. Many people doubted its credibility and initially gave lucken the benefit of the dow. The embattled company also received unlikely support from citron researchers. Andrew left left is predominantly a short seller, but sometimes he goes long stocks he thinks are undervalued.
On the same day that the report was released, citron tweeted, they were long-looking coffee and confident that it was not a fraud through their own research. They thought the coffee chain's business was on fire and the anonymous short report would fall short on accuracy. On april, 2nd 2020 luckin released the findings of their internal investigation. They confirmed that the co had in fact, fabricated 310 million dollars worth of sales in 2019. This cleared away any doubt that the company was fraudulent in the stock tank 80 percent. That day, within a few weeks, the company fired its ceo and ceo, who were both involved in the fraud. The company also received a notice from the nasdaq saying that they would soon be de-listed. Luckin actually saw a boom in their business in the days following the fraud being exposed.
Their app's daily downloads searched from 45 000 a day to 325 000, as new customers wanted to cash in on their free promotional drinks before the company went under. Unfortunately, since these drinks were free, luckin was not able to make any revenue from them. One beijing resident told reuters quote i'm not that into coffee, but it'd be a pity to lose the chance for a free drink. After all, you don't know how much longer looking can hold on in september of 2020, the chinese government fined lucken and a few related companies, 9 million dollars for the fraud.
In december, the sec settled with the company to pay 180 million dollars in penalties for intentionally deceiving investors. Despite the revelations of fraud, the company continued to operate its stores, while the stock was delisted from the nasdaq it still trades on the over-the-counter markets under the ticker symbol, lk ncy, surprisingly, its price has experienced a strong rebound increasing 800 since its lows on may 22nd. The company continues to burn through cash without being listed on a major exchange. It is very difficult for them to raise capital.
In february of 2021, they filed for chapter 15 bankruptcy protection in new york. This move will protect them from u.s creditors while they restructure their business within china. The bankruptcy proceeding will not impair the company's day-to-day operations in china, where it continues to run retail locations. While the company has posted updates about their legal proceedings and restructuring plans, it appears that they have not published any financial results for 2020 or 2021, so we have no idea how their business is doing.
This makes it all the more curious why investors were willing to bid the stock price back up to 12 on the over-the-counter markets in response to the luck and coffee debacle, as well as other high-profile frauds, former u.s president donald trump signed into law, the holding foreign Companies accountable act. This law requires all foreign companies listed in the u.s to be audited by the us's public company, accounting oversight board or pbaoc. Currently, the chinese government does not allow the pbaoc to conduct audits of companies headquartered in mainland china. If the two countries cannot come to an agreement about these issues by 2023, many, if not all chinese companies listed on major u.s exchanges, could see their stocks de-listed, alright, guys that wraps it up for this video. What do you think about luck and coffee's fraud? Why do you think that luck in stock was able to rally 800 off its all-time lows? Let us know what you think in the comment section below, if you like the content, make sure to like subscribe and share this video, as always. Thank you so much for watching and we'll see in the next one wall, street millennial signing out.
I am honestly surprised that this story ends with Trump doing a genuinely good thing. Assuming that this regulation does what it is intended to do and it actually has some teeth, this is a great thing and will boost confidence in the US stock market for investors and will make it easier for money to go to companies that actually deserve it.
Sometimes you gotta wonder if there is a metascam going on. Lets say you run a company and for sure know what it's worth, as an executive or a board member you are in perfect position to tank the company shareprice in order to buy it up on the cheap yourself. For example by inventing a fraud story that never happened. Scams to push up the share price beyond what it's really worth are all over the place, the inverse must also sometimes happen.
Business model new coffee shop, we give free coffee away to get more customers who we also we give free coffee away. Genius!! Reminds me of the underwater stealing gnomes on South park.
I think it was able to rally 800% because it's backed by evil.
Many theories but they all amount to a trap to sucker in/take money from unsuspecting people. Wall street and big business is made up of mostly addicts,….whether it's money, food, drugs, alcohol, sex, video games, social media, work (whatever)….an addict is an addict and most will sell their soul/do whatever it takes for that addiction.
"I'm not that into coffee but it'd be a pity to lose the chance for a free drink." Phuckin' Mood.
I don't like it but I'll try it for free.. you're basically the person in the supermarket giving out free samples not a business.
I think the owner of luckin coffee (which is the stupidest name ever)… the owner was definitely in on it and not just turning a blind eye but I believe the owner was the one who came up with the idea to hide profits. Then he would scapegoat the CEO and CFA. There’s no owner so incompetent he’d hiring fraudulent executives who run his company into the ground. No he knew who he hired, people that would do his bidding and take fault for a heavy commission. There’s so much fraud in Chinese air, it surpasses pollution.
"They do not understand our business model"
Dude, you sell brewed coffee. How hard can it be to grasp?
Citron also said that "Suckers buy GME" before the short squeeze.
the stores did accept cash and i used to order it both with cash and online. and their quality was = to starbucks plus half the price. it is a beautiful business model except the fraud.
SEC are corruption…they always destroy XRP….Please catch and send Gary Gensler, William Hinman, Jay Clayton, Sarah Netburn and Joseph Lubin to jail quickly…
Nobody was held accountable. The us fines were substantially higher than the cn ones.they file for bankruptcy only in the us.
It pretty much shows that cn is going to cover them no matter what. So they may not go outside china ever again but the stock can still grow inside the cn market which is still a pretty big market with a growing middle class.
And I doubt cn will permanently allow a foreign country to be the dominant one in their market indefinitely.
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I looked it up and I can only find two Luckin locations in the entire world. Why is that?
The PCAOB does not "audit" anyone. They are a regulatory board that sets certain "audit requirements" and reporting requirements that apply to companies on the US stock exchanges. The audits are done by the large accounting firms. The OCAOB was created as a result of the Enron fraudulent financial statements after that company went bankrupt in a few months,
Wait… If a bunch of Chinese stocks get de-listed, won't that negatively affect the broader U.S. stock market?
I remember the US wanted to push the culture to china, it looks like it is working, frauds are appearing in multiple industries
Investing is a gamble. Either you win or lose. Be careful in choosing where to invest. Just do not put all your eggs in one basket.
Solution : Try selling coffee ! Why the fuck do MBA and JD always want free money 💰 from investor BUT REFUSE TO ACTUALLY SELL PRODUCTS TO PEOPLE ! So absurd !
I once bought stocks in a chinese truck manufacturing company , i decided to look at what they where making first . It was 20-30 years behind in terms of technology . They dont exist anymore ……… there’s a reason Mercedes / Caterpillar are the powerhouses that they are xD
This retirement quote always strike me as a relevant,because I've seen far too many people retire at a specific target age and then following a few months or year of retirement, wonder why they are so bored
If you insist on investing in a chinese company, make sure you invest only the money you can afford to lose…
Every things in China are fake from rice baby formula to soy sauce even the eggs and cooking oil
Fundamentally it might be a good company in the long run and they might overcome this dissaster, hence investors buy especially at these cheap prices
In the end your up around 800% . In the end it seems that a couple of people were responsible for this. It all depends if they really succeed in overcoming this situation
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Buying stock is stupid buy products and resell at least you don’t loose cash as long as you buy what people always need or always want and make cash the market is a hustle to get your retirement lost keeping. You working longer and harder then needed
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Damn I remember looking at this company back around 2018, something didn't look right as it looked too good to be true while the cannabis bubble inflated