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Starbucks' China challenger Luckin surges in upsized US listing

Investors overlook cash burn to focus on growth outlook

Luckin Coffee has expanded rapidly across urban China, relying on discounts and rapid delivery to grab customers from Starbucks.    © Kyodo

NEW YORK -- Coffee chain Luckin opened its first day of public trading Friday nearly 50% higher on the Nasdaq after an upsized initial public offering raised $561 million, reflecting a bullish outlook on Starbucks' China challenger.

Luckin started trading at $25 after the company priced its shares at $17, the high end of its expected range. The stock peaked at $25.96 before falling back to $20.38 at market close. The Chinese homegrown chain, which is burning through cash to achieve rapid expansion, first filed for a $100 million IPO but raised the target to $510 million. It ended up selling 33 million American depositary shares, three million more than planned.

Luckin rapidly grew to from a single trial store in Beijing less than two years ago to 2,370 stores across China at the end of March, winning on a strategy that places focus on delivery service. Its larger competitor, Seattle-based Starbucks, launched its own delivery service last fall in partnership with local internet giant Alibaba Group Holding, almost a year after Luckin. 

Reinout Schakel, CFO of Luckin, said on CNBC Friday that the company's founders "are used to using technology and disrupting industries." 

Luckin requires customers to use its app even for in-store purchases and leverages a large amount of data to optimize operations, Schakel said. The coffee chain also saves rent costs by having mostly small storefronts, which helps keep its drink prices 25% lower than Starbucks.

"There are clear bear points" about Luckin, said Rickin Thakrar, an analyst, in a research note on equity insight provider SmartKarma. He said slowing quarter-on-quarter growth, cash burn, a likely need for further funding and a lack of accounting personnel were reasons for that outlook. 

"However at the same time we believe the strategy that Luckin is deploying is correct in a market that is extremely compelling from a growth perspective," Thakrar said. "If Luckin causes enough havoc, we think it becomes a buyout candidate akin to Flipkart," the Indian e-commerce company that sold a 77% stake to Walmart last year for $16 billion.

Disclosures filed to the U.S. Securities and Exchange Commission show Luckin's costs reaching nearly $150 million in the first three months of 2019 -- almost half total spending in the entire year of 2018. Last year, Luckin recorded a $241 million net loss on a $125 million revenue. As its expansion accelerates, rent for retail space and other operating costs replaced marketing and sales as the top expense in the first three months of 2019.

Luckin has said it aims to double the size of its store network this year in a bid to dethrone Starbucks as China's largest coffee chain. The company has also said it will continue to invest in discounts to keep prices low. Proceeds from the IPO as well as from previous funding rounds will help Luckin realize this ambition. 

In April before its IPO filing, Luckin announced it had completed a $150 million funding round led by the world's largest asset manager BlackRock. The round followed a previous $200 million investment involving Singapore's sovereign fund GIC, China International Capital Corp and Joy Capital in 2018.

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