Text size
The Chinese chain has said it is negotiating with stakeholders to restructure its balance sheet.
Fred Dufour / AFP via Getty Images
Luckin Coffee
apply for bankruptcy protection. This is another step in the intricate saga of the enhanced Chinese retail chain.
Usually a bankruptcy makes the stock of a business worthless – eventually. However, Luckin (ticker: LKNCY) traded above $ 12 before the announcement and was still north of $ 7 after the news.
This gives the coffee chain a market capitalization of about $ 1.6 billion. What is happening? Is there $ 1.6 billion in value left for existing shareholders in Luckin, and should people consider investing in the difficult company?
Luckin had a rough run. Last February, the company denied reports that it had increased its sales, but by April, it had set up a committee to investigate the claims. In May, management changed, and in July, the company said its 2019 sales had inflated by more than $ 300 million.
The answer to both questions – whether there is $ 1.6 billion in value in the company and whether investors should look at the stock again – is almost certain. There are still shops. But the company’s management is new. Luckin ‘has not submitted financial statements for a long time, and no analysts are following the stock.
There is almost no way for any typical American investor to know what’s going on. This is not a recipe for investment success. Quo Vadis Capital, an independent registered investment adviser, said in a Friday report that the stock was likely to stand at zero.
Luckin does not comment on its share price, but does refer Barron’s to a statement indicating that filing Chapter 15 is routine “in the context of Cayman’s restructuring … and should not be confused with a terminal bankruptcy process that terminates, sells or liquidates the company.” Luckin was captured in the Cayman Islands.
Luckin is facing legal action in the US because investors want to recover losses suffered as a result of its financial misrepresentations. This is probably a factor behind his decision to file Chapter 15 bankruptcy protection.
Investors may be familiar with Chapter 11, the typical filing of a U.S. bankruptcy. Chapter 15 is similar, but for foreign enterprises. Luckin operates in China, although its shares are traded in the US
“The company is negotiating with its stakeholders to restructure the company’s financial obligations, to strengthen the company’s balance sheet and to enable it to proceed as a going concern from the Cayman process, to the benefit of all stakeholders, “reads the company’s Friday News release. The Cayman process is a restructuring effort the company announced in July.
“Stakeholders” and “shareholders” are important, not synonyms. Shareholders are one group of stakeholders of a company, along with debtors, suppliers, employees and others. Although companies may emerge from bankruptcy as a going concern, selling coffee and croissants in the case of Luckin, reorganization plans usually involve the cancellation of existing shares. Creditors, not shareholders, are paid from the existing assets of a company.
Even if a company manages to list shares again, the amount of outstanding shares will be very different and the creditors will eventually get the bulk of the reorganized company.
Luckin shares no longer trade on a stock exchange. Shares trade in the ‘over-the-counter’, or OTC market. Two parties – through brokers – can still exchange shares, but this is not the same as trading on a stock exchange. To begin with, neither party – the buyer and the seller – can readily find credible deals in an OTC environment. And an OTC trade is between two parties. At an exchange, market makers collect orders for many market participants.
Trading Luckin stock in the domain of professional investors with bankruptcy experience or traders who want to quickly buy or sell dollars of a volatile stock. For the rest of the investment community, it’s just a story to watch and not a stock to invest in.
Write to All root at [email protected]