China/Asia TMT

Shawn Yang

China growth and global non-US Internet equities

Blue Lotus Research Institute

Blue Lotus Research is a Hong Kong Type 4 Licensed investment advisory firm focusing on Chinese growth equities and global non-US Internet equities

Equity Bottom-Up

<ul>
<li>We expect Luckin to report 2Q23 rev. at 75.0% YoY and 30.1% QoQ to RMB5,771mn. We expect GPM, non-GAAP OPM, non-GAAP NPM to decline 3.7ppt, 3.6ppt, and 3.9ppt QoQ .</li>
<li>Luckin is putting scale ahead of profitability, surpassing 10k total stores in 2Q23 and heading to 12k total stores in 2023, while maintaining a decent margin. </li>
<li>We maintain the stock as BUY rating and cut TP by US$3.5 to US$37.5 (36x PE in 2024) to factor in the margin dilution effect from sales promotion.</li>
</ul>


We expect Luckin to report 2Q23 rev. at 75.0% YoY and 30.1% QoQ to RMB5,771mn. We expect GPM, non-GAAP OPM, non-GAAP NPM to decline 3.7ppt, 3.6ppt, and 3.9ppt QoQ .
Luckin is putting scale ahead of profitability, surpassing 10k total stores in 2Q23 and heading to 12k total stores in 2023, while maintaining a decent margin. 
We maintain the stock as BUY rating and cut TP by US$3.5 to US$37.5 (36x PE in 2024) to factor in the margin dilution effect from sales promotion.


Luckin Coffee (LKNCY US, BUY, TP US$37.5) TP Change:Promotion and Expansion Are the Main Theme

<ul>
<li>Cotti Coffee has become a head-to-head competitor of Mixue’s Lucky Cup, and to a lesser degree, Luckin. </li>
<li>But what is behind Cotti’s agenda, in our view, is its founder Charles Lu’s aspiration to return to Luckin;</li>
<li>The biggest obstacle for Charles to repeat the playbook of Steve Jobs is Chinese security regulator’s refusal, so far, to allow franchised chain to list</li>
</ul>


Cotti Coffee has become a head-to-head competitor of Mixue’s Lucky Cup, and to a lesser degree, Luckin. 
But what is behind Cotti’s agenda, in our view, is its founder Charles Lu’s aspiration to return to Luckin;
The biggest obstacle for Charles to repeat the playbook of Steve Jobs is Chinese security regulator’s refusal, so far, to allow franchised chain to list


[Luckin Coffee Inc. (LKNCY US) Company Update]: Is Cotti Coffee Charles Lu’ NeXT Computer?

<ul>
<li>Luckin Coffee 1Q23 revenue beat is due to higher-than-expected store expansion, while SSSG is in-line with our estimate. </li>
<li>The normalized of RMB9.9 per cup campaign is expected to generate minor impact on Luckin Coffee’s profitability. </li>
<li>We maintain the stock as BUY and maintain TP at US$41.</li>
</ul>


Luckin Coffee 1Q23 revenue beat is due to higher-than-expected store expansion, while SSSG is in-line with our estimate. 
The normalized of RMB9.9 per cup campaign is expected to generate minor impact on Luckin Coffee’s profitability. 
We maintain the stock as BUY and maintain TP at US$41.


[Luckin Coffee (LKNCY US, BUY, TP US$41) Earnings Review]: Price War Will Work to Luckin’s Advantage

Greater China Equity Long/Short Analyst

Eric Chen

Focus Media Information Technology Co, Ltd. / Equity Bottom-Up

Focus Media Information Technology Co, Ltd. (002027 CH)

Focus Media Information Technology Co, Ltd.

<ul>
<li>Urbanization and brand premiumization are Focus Media's two long term structural drivers which will keep broadening its audience and advertiser base.</li>
<li>1Q23 results end a 5-quarter streak of profit decline and  mark the start of new profit cycle. This will usher in a meaningful stock re-rating if history is a guide.  </li>
<li>We expect at least 30% upside by the end of 2023 by applying 25x P/E (still at large discount to last profit cycle) on RMB4.9 billion net profit for 2023. </li>
</ul>


Urbanization and brand premiumization are Focus Media's two long term structural drivers which will keep broadening its audience and advertiser base.
1Q23 results end a 5-quarter streak of profit decline and  mark the start of new profit cycle. This will usher in a meaningful stock re-rating if history is a guide.  
We expect at least 30% upside by the end of 2023 by applying 25x P/E (still at large discount to last profit cycle) on RMB4.9 billion net profit for 2023. 


Focus Media (002027 CH): Light at the End of Tunnel

<ul>
<li>We think the coffee price competition, mainly between Luckin and COTTI, is temporary, and will have little impact to Luckin’s gross margin. </li>
<li>We also think COTTI’s low pricing strategy is unsustainable, and its franchisees are keen for price hike.  </li>
<li>We maintain the stock as BUY and maintain TP at US$41.</li>
</ul>


We think the coffee price competition, mainly between Luckin and COTTI, is temporary, and will have little impact to Luckin’s gross margin. 
We also think COTTI’s low pricing strategy is unsustainable, and its franchisees are keen for price hike.  
We maintain the stock as BUY and maintain TP at US$41.


[Luckin Coffee Inc. (LKNCY US, BUY, TP US$41) ]: Temporary Price Competition Has No Impact on Margin

China

Luckin Coffee Inc. provides non-alcoholic beverages. The Company offers various types of coffee. Luckin Coffee serves customers in China.

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Luckin Coffee (LKNCY US)