Luckin Coffee’s stock price has been falling due to short selling! Why is it so difficult to make coffee?

Luckin Coffee’s stock price has been falling due to short selling! Why is it so difficult to make coffee?

On January 31, Muddy Waters Research, a well-known short seller of Chinese stocks, released an 89-page short report on Luckin Coffee and said on Twitter: "We received an 89-page unidentified report claiming that Luckin Coffee is a scam: 'In the third quarter of 2019 and the fourth quarter of 2019, the number of daily items in its stores was exaggerated by at least 69% and 88%, respectively, with 11,260 hours of store traffic videos as evidence.' We believe this work is credible."

After the news was announced, Luckin Coffee's stock price plummeted by more than 20% at one point, marking the largest intraday drop in nearly five months. As of press time, Luckin Coffee was trading at $32.49 with a market value of $7.808 billion, a single-day drop of 10.74%. This is undoubtedly a further blow to Luckin, which had already continued to decline due to the impact of the epidemic in the previous month. Not long ago, Luckin Coffee’s market value once exceeded the 10 billion US dollar mark.

On February 1, it was reported that Luckin Coffee's stock price plummeted 10.74% on Friday, closing at US$32.49, due to short selling by the well-known short-selling company Muddy Waters and the impact of the new coronavirus pneumonia epidemic.

Muddy Waters Research, a well-known short-seller focusing on Chinese stocks, said on Friday that it had received an unnamed 89-page report revealing that Luckin Coffee had committed fraud by exaggerating the number of items sold each day. Muddy Waters said it believed the report was credible.

Regarding the short selling of Luckin Coffee, Business Observer believes that the anonymous nature of the report affects its authority. However, Luckin Coffee's high-density and frequent diversification initiatives over the past year or so, as well as the continued investment required, are also worrying.

Looking at the timeline, while Luckin Coffee was aggressively expanding its coffee chain (currently there are over 4,000 stores), it also invested in light lunch and snack businesses, created the "Xiao Lu Tea" brand to enter the tea beverage field, collaborated globally to export digital solutions, and even recently attempted to aggressively develop unmanned retail.

Diversification too quickly is always a concern.

According to Luckin Coffee's 2019 third quarter financial report, Luckin Coffee's total revenue in the first three quarters of 2019 was 2.929 billion yuan, and its operating profit was negative 1.808 billion yuan. The net cash flow from operating activities was negative RMB 1.126 billion, and the net cash flow from investing activities was negative RMB 1.606 billion.

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