Luckin Coffee (OTCMKTS:LKNCY) has been moving up ever since the Dec. 17 report was published from the company’s joint provisional liquidators (JPL). Since then LKNCY stock has been spiking. I believe that it could go much higher from here.
At one point the stock went from $3.74 before the report to $9.42. At the end of 2020, the stock was at $8.50 per share. Based on my analysis, I believe the stock could be worth significantly more than this, at least 100%-150% higher within several years.
Luckin Coffee’s Financial Condition
When I last wrote about Luckin Coffee on Nov. 4, I decried the lack of information about the state of its finances. That all changed on Dec. 17.
The company posted on its website a report from the liquidators who’ve been in charge of the company since its “light touch” liquidation. This is effectively similar to Chapter 11 restructuring. (That 44-page JPL report can be seen here on the company’s website.)
Several important facts came out. First, the JPL indicated that the outlines of a compromise were close. They are negotiating between the company’s $460 million convertible debt holders as well as class action common stock owners. A report is due out on Jan. 15, and the report seemed to imply that an agreement might be disclosed then.
Second, the SEC’s $180 million fine does not have to be paid right away. In fact, it can be “offset” by any dollar amounts are paid to the $450 million convertible bondholders and the shareholders.
Third, the company provided financial outlook information. On page 23 of the report, the liquidators (JPL) said the company should become cash flow breakeven on a normalized basis in the first half of 2023. Moreover, on page 27, the JPL said that Luckin Coffee had already become profitable on the store level for the first time in August 2020.
Lastly, the JPL provided a very interesting and useful projection of the company’s finances, especially on page 42 of the report. First of all, Luckin’s sales grew 35.8% year-over-year in the quarter ending Sept.
But more importantly, the company projected that sales would reach between $1.01 billion and $1.88 billion by 2023. That would be up from about $603 million this year.
What This Means for Luckin Stock
The midpoint of the sales projection, $1.45 billion, is 2.4 times this year’s sales in just three years. That represents compound sales of growth of over one-third annually for the next three years. Moreover, we can use this to estimate the value of Luckin stock. This assumes the parties reach an agreement with the convertible bondholders.
Using a multiple of 3-5x sales, the value of Luckin Coffee can be forecast. For example, using a multiple of 3x mid-point sales for 2023, the market capitalization will be $4.335 billion.
Now since there are 1.923 billion ordinary shares, and since there are eight ordinary shares per one American Depository Share (ADS), that means there effectively 240.3 million shares outstanding. Therefore, $4.335 billion divided by 240.3 million shares gives a value of $18.04 per share.
Moreover, at 5x sales, the market capitalization will be $7.225 billion. With 240.3 million shares this implies a price of $30.06 per share.
The average of these two is $24.05 per share. This represents a gain of 182% over today’s price of $8.50 per share. Even if we discount the price in the future by 15% for three years, that means it is worth $15.81, or 65.7% of the mid-price.
This is still a potential gain of 86% for investors who buy LKNCY stock today.
But don’t forget that there are considerable risks. For one, the company still has not reached an agreement with bondholders and the class-action stockholders suit.
It’s possible that the bondholders want not only a huge portion of cash but also a large dilutive stake in the restructured company. That could cut the $24.05 target by 50% or $12.03 per share. This is still 41% above today’s price.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.