Morning Markets: Money-burning Luckin Coffee’s U.S. public offering wants to raise big money.
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The China-based, delivery- and mobile-focused coffee chain is moving ahead with its IPO, despite slowing growth and sharply negative operating results. Indeed, the firm’s latest F-1 filing indicates that the company intends to sell 30 million shares at $15 to $17 per share.
That shakes out to $450 million to $510 million. Toss in the 4.5 million shares reserved for underwriters, and Luckin could sell equity worth between $517.5 million to $586.5 million in the transaction. Those are big numbers.
But the amount of money the company intends to raise may feel surprising. After all, Luckin was worth $2.9 billion when it last raised money ($150 million last month). Why does Luckin need that much new money? Let’s explore.
The Cost Of Growth
Luckin’s F-1 reports three forms of losses that we care about.
First, Luckin’s sharply negative operating income. The company had an operating loss of 110.1 percent of revenue in the first quarter of 2019, for example. That was an improvement on its operating loss of 143.7 percent in Q4 2018. Both numbers, however, are quite poor.
Turning to the stricter net income metric, Luckin is in worse shape. The firm lost 115.3 percent of revenue on a net basis in the first quarter of this year. That was better than its net loss of 143.7 percent of revenue in the final quarter of 2018, but still a dismal result for a company looking to go public.
The firm also consumes cash, though less over time. Luckin torched $93.5 million in cash during Q1 2019 to fund its operating activities to pick a data point, down from $123.6 million in Q4 2019. Again, an improvement but only so much of one.
Those metrics (more on how Luckin’s growth is slowing while its losses remain high, here) indicate just how unprofitable Luckin remains. The company doesn’t provide a pure gross margin metric, but “cost of materials” alone consumed 57.6 percent of its revenue in Q1 2019. So, Luckin is chasing fast growth with sub-50 percent margins; this makes its 2018 revenue multiple (employing its most recent private valuation) of 23.2x plain odd.
What Luckin needs to do to keep the magic alive is continue to grow. That means money. And as IPOs are ready-made fundraising mechanisms, here we are watching Luckin pursue one.
Luckin will continue to post strong year-over-year growth results for some quarters. How well the firm’s growth will fare later in 2019 when its fresh results are compared to its enlarged historical revenue results will prove interesting (it’s easier for the company to post strong growth now, as its early-2018 results were modest).
For American investors possibly enamored with all things China, and “growth,” perhaps Luckin will prove too tempting to miss. More when we have notes on when it should price.
Illustration: Li-Anne Dias.