Blue Lotus Research Institute

Andy Fu

China growth and global non-US Internet equities

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>Luckin launched lemonade drinks with raging success of 5.08 mn cups sold for the first week, ~10% of store sales. Market cheered to send the stock higher;  </li>
<li>We view it with mixed feelings. While it is margin accretive and sales enhancing,  is not conducive to improving coffee penetration and cultivating consumers' habit for drinking coffee;</li>
<li>We see Luckin as increasingly one of, instead of the, street drink company, because lemonade is actually the top selling SKU of all milk tea vendors in China. </li>
</ul>


Luckin launched lemonade drinks with raging success of 5.08 mn cups sold for the first week, ~10% of store sales. Market cheered to send the stock higher;  
We view it with mixed feelings. While it is margin accretive and sales enhancing,  is not conducive to improving coffee penetration and cultivating consumers' habit for drinking coffee;
We see Luckin as increasingly one of, instead of the, street drink company, because lemonade is actually the top selling SKU of all milk tea vendors in China. 


Luckin's Small Step into Non-Coffee Drinks Is a Big Step of Its Future Directions

HK/China Equity Long-Short

Osbert Tang, CFA

<ul>
<li>
<a href="https://www.smartkarma.com/entities/luckin-coffee-inc" target="_blank" data-smartkarma-citation="entities:28046:1" rel="noopener">Luckin Coffee (LKNCY US)</a> concluded FY23 with a 203.3% surge in non-GAAP net profit to Rmb3.2bn, benefiting from higher store count and monthly transacting customers.</li>
<li>Luckin plans to lift store count by at least 23%, with total to reach over 20,000 in FY24. Product innovation, promotional discount reduction, and better store efficiency are profit drivers. </li>
<li>Net cash reached Rmb3.8bn, or 7% of market cap. With a consensus EPS forecast of 28% CAGR in the next two years, its 15.1x and 11.7x PERs are not stretched.</li>
</ul>



Luckin Coffee (LKNCY US) concluded FY23 with a 203.3% surge in non-GAAP net profit to Rmb3.2bn, benefiting from higher store count and monthly transacting customers.
Luckin plans to lift store count by at least 23%, with total to reach over 20,000 in FY24. Product innovation, promotional discount reduction, and better store efficiency are profit drivers. 
Net cash reached Rmb3.8bn, or 7% of market cap. With a consensus EPS forecast of 28% CAGR in the next two years, its 15.1x and 11.7x PERs are not stretched.


Luckin Coffee (LKNCY US): Feeling Lucky in a Challenging Market

Blue Lotus China New Economy Research, Blue Lotus Research Institute

Eric Wen

Blue Lotus China New Economy Research

<ul>
<li>Despite Cotti’s difficulties, we are seeing intensified competition with well-funded competitors like Starbucks and KFC, joining the price war, which poses challenges to Luckin’s effort at raising prices.</li>
<li>We see Luckin at losing its coffee differentiation. We revised down average store sales growth to (5%)/(10%)YoY due to weak sales caused by the narrowing scope of the RMB9.9 promotion</li>
<li>We downgrade the stock rating from BUY to SELL and lower TP to US$17/ADS.</li>
</ul>


Despite Cotti’s difficulties, we are seeing intensified competition with well-funded competitors like Starbucks and KFC, joining the price war, which poses challenges to Luckin’s effort at raising prices.
We see Luckin at losing its coffee differentiation. We revised down average store sales growth to (5%)/(10%)YoY due to weak sales caused by the narrowing scope of the RMB9.9 promotion
We downgrade the stock rating from BUY to SELL and lower TP to US$17/ADS.


[Luckin (LKNCY US, SELL, TP US$17) Rating Change]: Old Tricks Might Have Run Out of Its Use

<ul>
<li>In 4Q23, we expect Luckin Coffee revenue to increase 93% YoY to RMB7.1bn, and expect GPM/OPM to decline (5.8)/(1.3) ppt YoY to 19.0%/8.2%, respectively. </li>
<li>We cut 4Q23 operating income by 12%. In 2024, we raised our revenue estimate by 5% due to the speed up of new store opening schedule. </li>
<li>Furthermore, as price competition eased, we expect Luckin to offer less low-priced drinks, thus driving up OPM in 2024.</li>
</ul>


In 4Q23, we expect Luckin Coffee revenue to increase 93% YoY to RMB7.1bn, and expect GPM/OPM to decline (5.8)/(1.3) ppt YoY to 19.0%/8.2%, respectively. 
We cut 4Q23 operating income by 12%. In 2024, we raised our revenue estimate by 5% due to the speed up of new store opening schedule. 
Furthermore, as price competition eased, we expect Luckin to offer less low-priced drinks, thus driving up OPM in 2024.


[Luckin Coffee(LKNCY US, BUY, TP US$43) TP Change]: Weak Earnings in 4Q23 but Better Outlook in 2024

Thematic (Sector/Industry)

<ul>
<li>1810 HK/AAPL: Xiaomi’s China unit volume grew 17% yoy in 2Q (+/-)</li>
<li>1810 HK: Xiaomi acquires more land to build another EV factory (+)</li>
<li>981 HK/1810 HK: SMIC’s upcoming “5nm” process to feature significant efficiency improvement (+/-)</li>
</ul>


1810 HK/AAPL: Xiaomi’s China unit volume grew 17% yoy in 2Q (+/-)
1810 HK: Xiaomi acquires more land to build another EV factory (+)
981 HK/1810 HK: SMIC’s upcoming “5nm” process to feature significant efficiency improvement (+/-)


[Blue Lotus Daily]:1810 HK/AAPL/981 HK/LKNCY US/BZ US/LI US/1211 HK

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)

Luckin's Small Step into Non-Coffee Drinks Is a Big Step of Its Future Directions

Luckin's Lemonade drinks are a short-term profit boost, but may not sustain due to lower quality. Luckin's pursuit of me-too SKU is worrisome to us.

Blue Lotus Research Institute