Luckin Coffee Highlights
At the end of 2022, LKNCY (Luckin Coffee) rapidly expanded. The overall store number was 8,214, covering nearly 240 cities, with the addition of net new store openings 368. Last week, Luckin Coffee reported its total net revenue surged 85% year-on-year to USD 646 million in the first quarter (2023). Such rapid revenue growth in China’s crowded coffee market is impressive. Luckin Coffee once again topped the new consumption trend in China's coffee market as shown in the investment articles.
CO-VID Restriction for China
Other investment articles demonstrated at the end of November, China abruptly removed all the COVID restrictions, which is a positive development. Although co-vid pushed LCKNY revenue downwards, there is a tailwind whereby LCKNY revenue will rebound at the end of the Covid period. Nonetheless, LCKNY is renowned for its takeaway services and may have already reached its postulated peak during the Covid period.
The subsequent massive infections and the overstretched healthcare system had kept many people from going out due to either infection or fear of being infected. Thus, the pace of new store openings by LKNCY did not really recover in December, in spite of the end of the zero COVID policy in China. Hence, I hypothesized the demand will only return in 2023.
Partnership Stores
In the first to the second quarter of 2023, there is a significant trend in recovery. There is also a higher proportion of Partnership stores, famous for having higher gross margins by sharing the stores with others when there is already strong branding with China consumers.
Evidently, the partnership store pie will continue to increase during 2023 and not saturate so fast. Most of the self-operated stores are in Tier 1 and Tier 2 cities, hence the partnership stores are mainly in lower-tier cities. Although the same-store sale growth visibly declined in the tier 1 city, the growth for the stores in tier 2 and 3 cities will increase significantly due to the stores increasing in density in these particular cities.
The growth during 4Q2022 and January 2023 continued to be more on density (more new stores in a given province) than geographic expansion (more provinces with orange numbers). It is worth noting that LKNCY has opened its stores in almost all mainland provinces except Tibet and Xinjiang, so the density-focused growth strategy makes sense.
Singapore Venture
During March 2023, LKNCY opened two new stores in other investment articles, demonstrating Singapore officially kicking off its international expansion in Southeast Asia. LKNCY planned to open ten stores in the region by April and also held talks with potential franchise partners in Thailand.
In 2022, Luckin Coffee Jiangsu Coffee Roasting Facility started construction in Kunshan. The facility is the second fully automatic intelligent coffee roasting facility built by Luckin Coffee after the Fujian facility. It is anticipated that by 2024, the new facility will be ready for operation, having a capacity of 30,000 tons of coffee beans.
Likely, the operating margin would be increased due to the higher efficiency of the additional supply distribution channel.
During the latest quarter result release, Luckin Coffee once again reported revenue growth of 85% in Q1 and 1,137 new store openings. This growth is impressive when in comparison to the valuation of its competitors like Starbucks, showing no signs of slowing down in its growth. The coffee chain operator said revenue growth was primarily driven by the increase in the number of products sold, the increase in stores in operation, and the increase in the number of monthly transacting customers.
Sentiment Analysis on Luckin Coffee
Negative news was released following the quarterly report release, stating an employer was reprimanded heavily by the boss for not doing her work correctly. This may have impacted the stock price adversely.
Fundamental Analysis
I project the worst-case scenario and it came up with a 5th-year forward cash flow of 614 Million USD. This, along with a terminal value of 4% (growth industry in China with its good GDP) results in a DCF target price of $26.4 USD
Also, the stock now trades at a price-to-earnings (P/E) ratio of more than 45, compared to 35 for Starbucks. [] Its forward P/E ratio ranges at 7.79 at the five-year mark.
Summary
LKNCY reported an impressive quarterly earning of 85% increased revenue growth last week despite its cheap forward earnings valuation. Its price has dropped by 23% since the good earning release and the negative news after the earnings.
In the future, more partnership stores in proportion will grow in 2nd and 3rd tier cities while it is also expanding globally, which signifies moderate revenue growth. The end of covid marks a renewed growth of the company stores' sales and the opening of more stores with a strong recovery trend. Macro-wise, coffee production is slated to increase significantly, while demand is not likely to drop despite inflation as long-term consumption remains strong.
Disclaimer: This website is not financial advice and is merely for entertainment and reading purposes.
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