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NOT SO LUCKIN

It appears that the Chinese government isn’t the only one misreporting data to the public these days.

China-based Luckin Coffee announced an internal investigation found that the company’s COO Jian Liu fabricated $310M worth of sales beginning in Q2 of 2019, though exact details were not provided. The “Dunkin' of China” indicated that investors should not rely on financial statements for the nine months ending September 2019. Well, no sh*t.

Luckin’s stock price dropped 80% on the news. That is not a typo.

Muddy Waters, indeed

Things had been going well for Luckin since it IPO’d last May at $17 with a market value of $531M. The discount coffee company was exploding all over China (not unlike another...ahem... issue China had over the last few months) and became a legitimate threat to Starbucks, after reporting 4.5k stores as of January 2020. Heading into January of this year, Luckin’s share price was as high $51.87.

Short-seller Muddy Waters Capital received an anonymous report that fraudulent sales had been reported earlier this year. The China-focused research firm posted the report on Twitter and formally accused Luckin of fraud, which the company denied.

Fast forward two months, mix in a splash of cream, two sugars and a global pandemic, and it turns out the report was correct. Jian and a few of his Liu-tenants were found to be participating in acts of misconduct, including fabricating sales. Let’s just say, things must have been pretty awkward yesterday when the company announced findings.

The bottom line...

Muddy Waters CEO Carson Block hates to say he told you so... but he told you so. Block caught a ton of flak on Twitter for posting about his position and bringing the accounting scandal to light.

While taking his victory lap, Block was sure to point out that this is a perfect example of why the market needs short sellers, and the risks of listing Chinese based companies on US exchanges.

Luckin Coffee shares sink 81% after special committee investigates 'misconduct,' suspends chief operating officer [MarketWatch]

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