Luckin IPO May Be Called the Starbucks of China, but Is It Really?

Jon C. Ogg

Many investors have played the “if I could just go back in time” game to pretend how much money they could have made if they bought shares in an up and coming company. Starbucks Corp. (NASDAQ: SBUX) is one such instance, with a market capitalization that is nearing $95 billion. Starbucks shares are up almost 20-fold since the selling panic’s depths of the recession in 2009 if you take dividends into account, and it’s up over 200-times its adjusted price for splits and dividends if you go back to after its 1992 post-IPO period.

Starbucks has seen major growth from China. Where investors might get a chance to go back in time, without actually having to go back in time, is that this week’s market of initial public offerings is about to see the debut of what some investors might easily want to refer as “The Starbucks of China.”

Luckin Coffee Inc., a Xiamen, China-based coffee chain, will debut in trading on Friday, May 9, with a stock ticker of “LK” on the Nasdaq. The company is aiming for its piece of the coffee pie in China. There is no question that this will put the company in a square fight with Starbucks for market share, but there are some rather undeniable difference as of 2019.

Luckin appears to be the largest mainland China IPO in America for 2019. The company is currently selling 30 million ADSs in a price range of $15.00 to $17.00. Each ADS will also represent 8 ordinary shares. The IPO is likely to raise more than $500 million when it prices.

Luckin was only founded in October 2017 and has expanded rapidly in 28 cities so far. Luckin’s “F-1” IPO filing indicated that it is the 2nd largest chain in China with some 2,370 stores. Those stores are 100% self-owned as well, with 90 million total items sold in 2018 to a customer base of just 16.8 million. Luckin uses mobile apps with a 100% cashier-less environment.

Revenue in the first quarter of 2019 was up a stunning 3,700% or so from a year earlier. In raw dollars, that’s revenue of $71.3 million. Its total revenue in fiscal year 2018 was $125.2 million, with an operating loss of $238.1 million.

Luckin is also said to have targeted some 2,500 new store openings for 2019 alone. The Chinese coffee chain was recently valued at $2.9 billion based on a recent capital raise by venture investors. That value may approach $4 billion by the time this IPO gets to market. The company described its store network in a very different manner than a traditional Starbucks customer would think of:

While operating three types of stores, we strategically focus on pick-up stores, which accounted for 91.3% of our total stores as of March 31, 2019. Our pick-up stores have limited seating and are typically located in areas with high demand for coffee, such as office buildings, commercial areas and university campuses. This enables us to stay close to our target customers and expand rapidly with low rental and decoration costs.

The Luckin underwriting group is fairly large: Credit Suisse; Morgan Stanley; CICC; Haitong International; KeyBanc Capital Markets; and Needham & Company. That same group of underwriters have typical a 30-day option to purchase up to an additional 4,500,000 ADSs from us at the initial public offering price

As far as how this compares to the real Starbucks, the company has roughly 30,000 stores globally and it recently was shown to have roughly 3,600 locations in China. Starbucks generated nearly $25 billion in Fiscal Year 2018 global revenues, and the company is likely to see revenues of closer to $30 billion in Fiscal Year 2021. What will be interesting to see is how the market treats Luckin Coffee in the U.S. IPO. Friday is that day of the trade tariff deadlines.

It seems from the outside that comparing a typical Luckin Coffee store to a traditional Starbucks store, even in China, is a bit like comparing coffee and tea. A recent report from Time said that Luckin may be more like a 7-Eleven than Starbucks. One additional difference is that Luckin Coffee didn’t get free advertising with one of its coffee cups left on a set in an episode of the Game of Thrones.