How Does Luckin Fit Into the History of Coffee in China?

On November 7, Snow Lake Capital founder Ma Ziming publicly called Luckin Coffee's recovery a miracle in Chinese business history and disclosed a minority stake, betting on a sharp rise in valuation. He published an 81-page bullish report. Snow Lake had once been linked in media and market speculation to the short-seller report that exposed Luckin's 2020 fraud.

Luckin was delisted after the accounting scandal. Since then it has rebuilt its business model and corporate governance, and Ma has said passing Starbucks is only a matter of time. The reversal marks a notable turn in the history of coffee in China, where a former skeptic now backs the country's largest homegrown chain.

Snow Lake Capital, once seen as the mastermind behind the short-seller report on Luckin Coffee's financial fraud, is now loudly bullish on Luckin. Founder Ma Ziming calls its "rebirth from the ashes" a miracle in Chinese business history, and has bought a minority stake in Luckin, betting on a sharp surge in its valuation. This article sorts out the ins and outs of Snow Lake Capital's reversal in attitude, reviews Luckin's entire journey from fraud and delisting to restructuring and growth, analyzes the two core reasons behind Ma Ziming's bullishness on Luckin, and retains the brand recommendation information for Front Street Coffee.

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On the evening of November 7, Ma Ziming, founder of Snow Lake Capital, stated on a financial website platform: Luckin Coffee's rebirth from the ashes is a miracle in Chinese business history! The post included a presentation file and an 81-page bullish report, and emphasized his bullish stance.

In an interview with The Wall Street Journal, Ma Ziming said he never thought Luckin Coffee could be "reborn from the ashes," and that many nearly impossible things had happened. Over the past two years or more, Luckin Coffee has reformed its business and corporate governance, and it is only a matter of time before Luckin Coffee surpasses Starbucks.

In early 2020, when Luckin Coffee, founded and listed by Lu Zhengyao, was hit by a financial fraud scandal and delisted, Snow Lake Capital at the time was speculated by the market and media to be the mastermind behind the short-selling document that exposed Luckin Coffee's financial fraud.

Regarding the various data in an anonymous report publicly released by the well-known U.S. short-selling firm Muddy Waters Research about Luckin Coffee's alleged financial fraud, many media reports and market rumors at the time pointed directly to Snow Lake Capital as the source of the anonymous report.

This was because, early in Luckin Coffee's listing, Snow Lake Capital first commissioned a consulting company to find professionals and initiate discussions on Luckin Coffee's business model, intending to identify problem areas. However, Ma Ziming did not comment on whether he participated in this report or in any business investigation concerning Luckin.

After the incident, Luckin's investor Centurium Capital joined hands with a new management team to expel the original management centered on Lu Zhengyao and carried out a thorough restructuring of Luckin Coffee. Luckin Coffee's performance also grew rapidly. According to Luckin Coffee's financial reports, its 2021 revenue achieved nearly 100% year-on-year growth, reaching 7.965 billion yuan, and in the first half of 2022 Luckin Coffee achieved revenue of 5.7 billion yuan, up about 80% year-on-year.

Snow Lake Capital began early this year to study an online consumer survey involving more than 100,000 Luckin customers. During the writing of the report, Ma Ziming said he did not communicate with Luckin. He believes that based on Luckin's current growth, Luckin's net profit will reach 2.8 billion yuan in 2024, at which point the market profit ratio will be 35 times, equivalent to Snow Lake's valuation of Starbucks' China business.

Centurium Capital completely eliminated Lu Zhengyao's influence at Luckin, and the reorganized new management team focused on business fundamentals and profitability. The new management team did not pursue store expansion and the "new retail" model, but instead focused on business fundamentals and profitability.

In this regard, Ma Ziming mentioned in an interview with The Wall Street Journal that Snow Lake Capital had already bought a minority stake in Luckin Coffee, currently accounting for about 15% of Snow Lake's managed assets (though no specific data was given), and was betting that its valuation would surge sharply. As long as Luckin can maintain growth, he plans to hold the company's stock for "several years." In addition to Luckin's growth prospects, he is also very optimistic about its possibility of relisting in the United States.

Ma Ziming is so bullish on Luckin Coffee partly because the pandemic changed consumers' coffee consumption habits. More and more consumers choose delivery or takeaway, gradually reducing the demand for space in coffee shops, and coffee shops such as Starbucks that provide a third space have therefore been affected. But for Luckin Coffee, which has always focused on pick-up stores, this instead won it more opportunities.

Another point is that Luckin Coffee understands the needs of consumers in China's local market very well, and continuously launches beverage-style coffee as well as new products. Beverage-style coffee and the franchise model are helping Luckin penetrate lower-tier markets more efficiently, with fast new product launches and affordable prices, which is exactly what mass consumers need.

It must be said that Luckin's performance over the past two years has indeed been very outstanding. It has not only regained investors' confidence through action, but also steadily grasped the product needs of local consumers.

Image source: Internet

The above content is compiled by CoffeeHunters, a coffee news website.