By Jing Yang
China's upstart Luckin Coffee Inc. grew at a blinding pace. It
opened stores faster than Starbucks Corp., doubled its valuation to
$12 billion eight months after going public and pleased its
big-name investors in the U.S.
Then, on April 2, Luckin said many of its sales had been
The shock brought a screeching stop to the three-year-old
juggernaut, sending its stock plunging 75% overnight. Since then,
investigators have delved into the books, executives have lost jobs
and a stock exchange has moved to delist Luckin, but no one has
explained just what went on inside the onetime corporate rocket
Now, some light can be shed.
It turns out that Luckin sold vouchers redeemable for tens of
millions of cups of coffee to companies that had ties to Luckin's
chairman and controlling shareholder, Charles Lu, according to
internal documents and public records reviewed by The Wall Street
Journal. Their purchases helped the company book sharply higher
revenue than its coffee shops produced.
Meanwhile, other internal documents showed a procurement
employee called Lynn Liang processing more than $140 million of
payments for raw materials such as juice, delivery and
human-resources services. Ms. Liang was fictitious, according to
people familiar with Luckin's business.
The scale and audacity of deception, which the Journal found
traced back to before Luckin's initial public offering on the
Nasdaq Stock Market just a year ago, has stunned international
investors and confounded regulators. This was a company that went
from founding to public listing in less than two years. Its sudden
fall saddled pension, mutual and hedge funds, not to mention
individual investors, with heavy losses both in Asia and the
Luckin on May 11 ousted its chief executive, Jenny Qian, and
chief operating officer, Jian Liu, but provided little detail. It
suspended or put on leave six others.
Ms. Qian couldn't be reached for comment. Mr. Liu hung up when
reached by phone. The only one of the other six who provided a
comment said he was just following orders.
Mr. Lu didn't respond to questions from the Journal. On May 20,
he said in a public statement: "My style may have been too
aggressive and the company may have grown too fast, which has led
to many problems. But I by no means set out to deceive
He also apologized and restated his faith in the company in the
statement, issued after Nasdaq moved to delist Luckin's shares, a
decision Luckin said it would appeal.
Luckin said in response to questions from the Journal that a
committee of its board is continuing an internal investigation and
responding to inquiries from regulatory agencies in the U.S. and
China. It said it couldn't comment on specific details relating to
the probe at this time.
"The Company continues to take appropriate measures to improve
its internal controls and remains focused on growing the business
under the leadership of its Board and current senior management
team," Luckin said.
Nasdaq, although seeking to delist Luckin, last week permitted
its American Depositary Shares to resume trading after a six-week
suspension. They promptly resumed their drop. The shares closed
Wednesday at $2.59, versus a brief high above $50 in January.
Luckin's fall has rekindled long-running tensions over the U.S.
Securities and Exchange Commission's inability to inspect financial
records of Chinese firms to protect American investors.
The SEC is among the agencies investigating Luckin, according to
people familiar with the matter. In April it issued a renewed
warning about the risks of investing in companies in China and
other emerging markets. China's top business and commerce regulator
has raided Luckin's headquarters in Xiamen, China, and taken
Luckin Coffee was born with a silver spoon in mid-2017, during
China's recent technology funding boom. While private it raised
more than half a billion dollars from investors including BlackRock
Inc., Singapore sovereign-wealth fund GIC and a bevy of Chinese and
American investment funds. Credit Suisse and Morgan Stanley courted
its executives and later won leading roles underwriting its public
Luckin's controlling shareholder, who goes by Lu Zhengyao in
addition to Charles Lu, is an entrepreneur who previously started
auto-rental firm CAR Inc. and a Chinese ride-hailing firm called
Ms. Qian, an executive at those earlier ventures, co-founded
Luckin with Mr. Lu and became its CEO. They fashioned it as a tech
company that could disrupt the expanding business of coffee sales
in China, dominated by Starbucks.
Luckin built its strategy around a mobile app, with which it
sent vouchers for free coffee to tens of millions of people, and
coupons for deep discounts on later purchases. The discounts
brought the price of a latte down to 12 yuan, or $1.67, about a
third the cost of a similar drink at Starbucks.
Customers ordered and paid electronically, eliminating cashiers.
Luckin promised to deliver coffee within 30 minutes. It told
investors its model helped it collect data to optimize sales and
By May 2018, just seven months after opening its first cafe,
Luckin had more than 500 of them, in over a dozen cities. It said
it obtained premium arabica coffee beans from Latin America and
Africa, syrup from Italy and milk from New Zealand. It boasted of
using high-end Swiss coffee machines and hiring award-winning
baristas to help design recipes and cafes.
At a glitzy launch party that included hordes of business
partners and journalists, Ms. Qian, standing in front of a giant
LED screen, said the goal was to provide affordable premium coffee
that people could access at any moment.
Days later, Luckin fired a salvo at Starbucks, which over two
decades had helped lure a tea-drinking population to coffee. Luckin
accused Starbucks of discouraging suppliers from doing business
with rivals and filed an antimonopoly lawsuit. Starbucks said it
welcomed competition. Luckin later dropped the suit.
A fundraising in June 2018 gave Luckin a billion-dollar
valuation just a year after its founding. The cash supercharged its
opening of cafes, many close to a Starbucks. The Seattle-based
giant, too, began delivering coffee to Chinese customers.
Luckin's IPO in May 2019 was a big success, raising $651 million
and valuing the company at around $5 billion on its first trading
day. Mr. Lu high-fived colleagues as the stock jumped.
Back in Xiamen, Luckin held a banquet for hundreds of business
partners, investors, bankers and lawyers. Guests posed for photos
at a booth mimicking the Nasdaq listing ceremony, and Ms. Qian
presented the next goal: 10,000 stores in China by the end of 2021.
Starbucks had fewer than 4,000 at the time.
"It was just explosive, humongous growth, and those numbers were
very seductive to a lot of investors," said John Zolidis, a
restaurant-industry analyst and president of Quo Vadis Capital,
which said it has never bought or sold Luckin stock.
A group of Luckin employees had already begun helping sales
along by engineering fake transactions, starting the month before
the IPO, according to people familiar with the operation. The
employees used individual accounts registered with cellphone
numbers to purchase vouchers for numerous cups of coffee. Between
200 million and 300 million yuan of sales ($28 million to $42
million) were fabricated in this manner, according to a person
familiar with the matter.
The undertaking became more complex. In late May 2019, orders
began flooding in under a fledgling line of business that involved
selling coffee vouchers in bulk to corporate customers, according
to internal records reviewed by the Journal.
Alongside bona fide voucher sales, to a few regular clients such
as airlines and banks, the records show numerous purchases by
dozens of little-known companies in cities across China. These
companies repeatedly bought bundles of vouchers, often in large
amounts. Rafts of orders sometimes came in during overnight
Qingdao Zhixuan Business Consulting Co. Ltd., situated in
China's northern Shandong province, bought 960,000 yuan ($134,000)
worth of Luckin vouchers in a single order, according to the
documents. They show it made more than a hundred similar purchases
from May to November of 2019.
Mainland China and Hong Kong corporate-registry records link
this company to a relative of Mr. Lu, to an executive of Mr. Lu's
previously founded Ucar Inc. and to a Luckin executive, via a
complex web of other companies and their directors and
shareholders. Qingdao Zhixuan also has the same telephone number as
a branch of CAR Inc. and is registered with a Ucar email
Luckin booked more than 1.5 billion yuan ($210 million) of
corporate sales in this manner in 2019, dwarfing genuine purchases
during the period, according to a Journal analysis of the
As money flowed in from the bulk sales, Luckin also made
payments to more than a dozen companies listed in its records as
providers of raw materials, delivery or human-resources services.
Many didn't exist until April and May of 2019, corporate
registration records show.
Chinese regulators who recently went through Luckin's systems
found more than 1 billion yuan (about $140 million) in questionable
supplier payments, according to the company's internal documents
and people familiar with the matter. The documents showed payments
were processed by Ms. Liang, the woman described as fictitious by
people familiar with Luckin.
According to internal records and a person familiar with the
matter, Luckin CEO Ms. Qian approved the payments and, in some
instances, actively saw to the progress of the payment processes.
The payments bypassed the chief financial officer, who then didn't
oversee Luckin's finance and treasury department, the person said.
The CFO, Reinout Schakel, declined to comment.
A look at registration records of companies that bought vouchers
and others that received repeated supplier payments shows that many
had links to Luckin, Mr. Lu or Mr. Lu's two previous ventures. Some
listed the same office addresses and contact numbers as branches of
CAR Inc. or Ucar. Several were registered with email addresses of
employees of those companies. One was registered with a Luckin
A few of the companies had links to a relative or a friend of
Mr. Lu. One regular bulk buyer of coffee vouchers, Date Yingfei
(Beijing) Data Technology Development Co. Ltd., has the same phone
number as a branch of CAR Inc. and a predecessor of Ucar.
Zhengzhe International Trade (Xiamen) Co. shows up in the
documents as a supplier of raw materials to Luckin.
Date Yingfei and Zhengzhe have the same legal representative,
Wang Baiyin, a former classmate of Mr. Lu. Mr. Wang owns 60% of
Date and 95% of Zhengzhe, according to corporate registration
records. Mr. Wang couldn't be reached for comment.
Not all details of the operations could be learned. People
familiar with these transactions surmised that, over time, the
rafts of purchases and payments formed a loop of transactions that
allowed the company to inflate sales and expenses with a relatively
small amount of capital that circulated in and out of the company's
accounts. It remains unclear what was the original source of funds
to kick-start the transactions.
In November 2019, Luckin reported a 558% year-over-year jump in
third-quarter product sales, and projected around a 400% rise for
the fourth quarter. Average net revenue from products per store
soared 80%, its financial report showed.
About two months later, after the stock price had roughly
doubled, Luckin raised $865 million in a follow-on sale of shares
and convertible notes. Its stock climbed further when Luckin said
it had overtaken Starbucks by number of cafes in China and it would
roll out numerous vending machines selling its drinks.
Then, on Jan. 31, Muddy Waters LLC, a U.S. short seller with a
record of exposing misbehavior at Chinese companies, circulated an
89-page unattributed report on Luckin. The report said an
examination of more than 11,000 hours of video footage of customer
comings and goings, of more than 25,000 customer receipts and of
observation by 1,500 individuals who visited Luckin outlets showed
that much of the company's revenue must be fabricated.
Luckin's stock took a dive but started rising again after the
company denied the allegations. The report was released around the
time Luckin's auditor was set to review 2019 results.
Two months later, on April 2, came Luckin's explosive
disclosure. Luckin said that as much as 2.2 billion yuan (about
$310 million) of its 2019 revenue had been fabricated. That
represented nearly half of its reported and projected sales from
April to December.
Auditor Ernst & Young Hua Ming LLP indicated the following
day it had sparked an internal investigation by finding that some
management personnel at Luckin fabricated transactions leading to
inflation of income, costs and expenses.
Luckin's once $12 billion valuation is now around $650
"Luckin Coffee has been mired in an unprecedented crisis and a
maelstrom of public debates," an internal company memo said on May
12. "We believe, with the help of all Luckin staff, the company
will overcome the crisis and get back on track."
contributed to this article.
Write to Jing Yang at Jing.Yang@wsj.com
(END) Dow Jones Newswires
May 28, 2020 12:24 ET (16:24 GMT)
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