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How a short-seller’s warning helped take down Luckin Coffee

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How a short-seller's warning helped take down Luckin Coffee


In January, days after the shares of Luckin Coffee Inc. hit a record high on the Nasdaq Stock Market, giving the company a $12bn valuation, a cryptic email arrived in the inboxes of multiple short sellers.To get more news about luckin coffee news, you can visit shine news official website.

"A new generation of Chinese Fraud 2.0 has emerged," it said. "Companies that start off as fundamentally and structurally flawed business model [sic] that evolves into fraud." The author offered to share customer receipts and videos from Luckin Coffee outlets, attached a long report about the company and said the short-sellers could publish and take credit for it.

Several American money managers reviewed the report, which accused Luckin of inflating its sales. Carson Block of Muddy Waters LLC published it, posting the 89-page report on Twitter on Jan. 31. Luckin's auditor subsequently discovered that several employees had faked revenue and expenses and on April 2, the company disclosed that as much as $310m of its 2019 sales were fabricated. Its shares collapsed, less than 11 months after the company went public, and will soon be delisted.

The stunning fall of Luckin, an upstart rival to Starbucks in China that touted itself as the country's largest coffee chain by stores, has sparked a lot of investor soul-searching. Should they have followed the recommendation of Block, who has bet against multiple listed Chinese companies? Should they have doubted the company when it refuted the allegations in the anonymous report? Could they have done more due diligence to determine whether Luckin's reported growth was too good to be true?

Well-known investors who lost money when Luckin's shares plunged include Stephen Mandel Jr.'s Lone Pine Capital and Steve Cohen's Point72 Asset Management. Commodities-trading giant Louis Dreyfus-which entered into a coffee-roasting venture and juice business with Luckin-and two top Chinese private-equity firms also had sizable equity investments in the company.

Several money managers who earlier invested in Luckin said they had little reason to doubt the company because it also had the backing of other prominent investors like BlackRock Inc. and Singapore sovereign-wealth fund GIC Pte. Ltd.

Some American hedge funds, wary of getting burned after previous frauds involving listed Chinese companies like Sino-Forest Corp. that also inflated sales, said they subjected Luckin to extra scrutiny before deciding to invest.

One fund's work included spot checks on individual stores, taking note of crowded ones and the ubiquity of Luckin's blue-and-white coffee cups. Independent data they reviewed showed a growth in downloads of Luckin's mobile app-used by customers to order products and make payments-that tracked the company's reported growth in sales.Some investors who visited Luckin stores in person had reservations about the company's business and strategy.

Baillie Gifford & Co., a large UK money manager, sent an analyst to China last year to visit several companies including Luckin, according to an article on its website. The analyst, who speaks Mandarin, met with Luckin's management, went to one of its shops in Shenzhen and spoke with customers. Baillie ultimately passed on making an investment.

BCC Global, a Shanghai-based due diligence and research firm, in September 2019 contacted some investment funds with an offer to monitor customer traffic and sales at a carefully selected sample of Luckin's cafes. After receiving interest in its proposal and doing its research and analysis, BCC found discrepancies with Luckin's reported figures, according to emails reviewed by the Journal and people familiar with the company.

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