On the evening of November 7, Sean Ma, the founder of Snow Lake Capital, a hedge fund that reportedly produced a damning 2020 short report on Luckin Coffee, released another research report on retail-trading platform Futu claiming that “the rebirth of Luckin Coffee is a miracle in Chinese business history!”
Ma confirmed to 36Kr on November 7 that the report was indeed produced by Snow Lake Capital, saying that “because it involved a lot of field work, it took at least half a year.” In an interview with the Wall Street Journal, Ma revealed that Luckin Coffee currently accounts for about 15% of Snow Lake Capital’s assets under management, but he did not say how many shares of Luckin Coffee himself or the company holds.
Luckin Coffee debuted on the Nasdaq in May of the previous year, taking less than two years from the opening of its first store to its IPO. The saga began at the end of January, 2020, when well-known short seller Muddy Waters LLC released a short report provided by “anonymous source,” accusing Luckin Coffee of forging $300 million in revenue. The brand issued an announcement in early April, 2020, acknowledging that the financial report was indeed fraudulent, and the firm was ordered to delist in June.
According to various reports, the traders behind this investigation all point to Snow Lake Capital, but the company itself has never clarified the matter. However, yesterday, it released an 81-page report, saying that it is firmly optimistic about the future of Luckin Coffee and that “it is only a matter of time before Luckin Coffee surpasses Starbucks in China.”
According to the report, Luckin Coffee’s target market value is expected to reach $14.7 billion, or $46.25 per share. In addition, Snow Lake Capital estimates that the internal rate of return of investing in Luckin Coffee can reach 131% within one and a half years (from August 2022 to December 2023).
Ma said that this report involved surveys of more than 100,000 Luckin Coffee customers. He also stressed that he had no contact with Luckin Coffee when preparing the report. Snow Lake attributed the brand’s “rebirth” to three aspects – right time, right place and right people.
“Right time” means that Starbucks’ model as an alternative office space failed because of the pandemic, and Luckin Coffee’s buy-and-go model enabled it to get a piece of market share.
“Right place” means that, based on a deep understanding of China’s coffee industry, Luckin Coffee invented coffee-based beverages that significantly expanded their target market and enabled coffee chains to expand into second-and third-tier cities.
“Right people” refers to the fact that Centurium Capital became the controlling shareholder of the company, helping the new management team to completely reorganize. Ma praised this as “a model of doing difficult and correct things.”
Luckin Coffee’s second-quarter financial report released on August 8 showed that total net income in the period increased by 72.4% to 3.2987 billion yuan ($455 million), the profit rate of self-operated stores was 30.6%, and the number of stores increased by 615. In contrast, Starbucks China’s net income dropped to 3.6769 billion yuan.