Luckin Coffee, the Chinese coffee chain that aims to challenge Starbucks in its home market, will set a world record as the first startup to list at a billion-dollar valuation only two years after it was founded. That is, if it is able to complete its up to $510 million US initial public offering later this month.
Should Luckin Coffee be able to make its debut on May 17 as scheduled, the high-flying startup will trade its shares publicly just 20 months after it was set up in October 2017. It will break Chinese e-commerce platform Pinduoduo’s record of listing just 33 months after it was founded.
Preliminary terms show that the company plans to issue 30 million American depositary shares at between $15 and $17 each. The IPO will account for 12.4% of its enlarged share capital and the company will list at a valuation of $3.6 billion to $4.1 billion on a pre-greenshoe basis.
These figures suggest another amazing fact – Luckin Coffee could boost its valuation by as much as 41% within a month. The coffee chain said that investors valued the business at $2.9 billion when it completed its $150 million series B+ funding last month.
The dramatic rise of Luckin Coffee to become China’s leading coffee chain is already a major talking point among private equity specialists and venture capitalists. While the firm has proved its cash-burning business model is plausible at this point, many analysts remain sceptical about how long it can sustain this pace and whether it can eventually break-even or even become profitable.
Luckin Coffee is listing at a time when investor confidence towards cash-burning and loss-making businesses is on the decline.
Pinduoduo, the Chinese online shopping site that accumulated customers quickly by selling products at heavily discounted prices, lost 17% of its value immediately after it posted a net loss of $352 million in the final quarter last year.
Shares of Meituan-Dianping have dropped as much as 42% since it listed in September last year. The Chinese food delivery giant, famous for offering discounts to its customers, saw its adjusted loss nearly triple from the same period last year.
The cash-burning business model is also in question for unlisted firms such as bike-sharing app Ofo and ride-hailing giant Didi Chuxing, which both ran into problems recently after overspending on their businesses.
These problems, however, are unlikely to deter Luckin Coffee’s IPO since it has already collected sufficient demand to cover the full deal, a source familiar with the situation told FinanceAsia.
ESPRESSO-CHARRED EXPANSION
Luckin Coffee’s cash-burning strategy suggests that it is likely to raise capital further after listing its business. That is particularly true as the coffee chain has been burning cash at the fastest rate since its inception.
Its preliminary prospectus shows that the business has reported a negative cash flow of $93.5 million for the first three months this year, more than five times that of the same period last year.
Most of the capital has been spent on opening new stores. Its store count increased to 2,370 as of the end of March from 2,073 at the end of last year. This suggests that it has opened nearly 300 stores over the last three months. That is a rate of more than three stores every day.
Should the business continue to spend at the same rate, then its IPO proceeds will only be able to sustain it for slightly more than a year.
And the company has no intention of changing its strategy in the near term.
“We intend to further increase our brand awareness, expand our customer base and store network, and expect to continue to invest heavily in offering discounts and deals and other aspects of our business, especially sales and marketing expenses, in the foreseeable future as we continue to expand our store network and our product offerings,” Luckin Coffee said in its preliminary prospectus.
To be sure, Luckin Coffee is poised to increase its revenue significantly during the course of its expansion. The company said that it expects its store count to surpass that of Starbucks China, which currently operates about 4,500 stores.
Mayer Investments Fund, Centurium Capital and Joy Capital own 12.4%, 11.9% and 6.75% of Luckin Coffee respectively before the IPO. Mayer Investments was an angel investor while Centurium Capital and Joy Capital invested in the company through its Series A and B rounds of funding last year.
In a concurrent placement of shares, Luckin Coffee said it will sell $50 million worth of shares to European agricultural commodities house Louis Dreyfus Company.
Credit Suisse, Morgan Stanley, CICC and Haitong International are joint bookrunners of Luckin Coffee’s IPO.
