Chinese online-to-offline beverage chain Luckin Coffee announced two separate developments on Tuesday aimed at a major cash raise including a five-year bond offering and a new share issuance, just eight months after its US stock market debut.
Why it matters: Issuing debt and new shares is a signal that the company is short on the cash needed to support its ambitions, namely rapidly increasing its footprint, deploying its unmanned store initiative, and international expansion.
- The company’s rate of cash burn makes this secondary raise unsurprising, but “that raise has come too early for the markets” as signaled by a 6% to 7% drop in Luckin’s share prices after the announcement, Michael Norris, leader of research and strategy at AgencyChina, said on Wednesday.
- The firm is pushing forward with a capital-intensive strategy to grow its store network, this time with vending machines.
Details: The company said that its stores numbered 4,507 at the end of 2019, putting it ahead of rival Starbucks’s 3,600 outlets in China and making it the largest coffee chain in the country. It served 40 million customers in 2019.
- The bonds come in the form of senior notes, meaning the debt will be prioritized if the company goes bust.
- The first purchasers will be granted the option to buy an additional $60 million in subsequent bonds. The price or interest rate of the bonds has not been set.
- Bond holders can choose to convert the bonds into equity before the January 15, 2025 maturity date.
- The offering includes a risk clause requiring the startup to buy back all or part of the notes on January 15, 2023, or “in the event of certain fundamental changes.”
- Luckin Coffee will issue 7.2 million American Depositary Shares (ADS) and an undisclosed shareholder will issue an additional 4.8 million shares, with a jointly offered 30-day overallotment option of 1.8 million ADS.
- The main underwriters of the new shares include Credit Suisse, Morgan Stanley, China International Capital Corporation Hong Kong, and Haitong International.
- Its search for new funding close to the value of its initial public offering (IPO) will help the company as it doubles down on its “smart unmanned retail” initiative, according to a statement. The new retail strategy promised applications for the Internet of Things, big data, and facial recognition, but offered no further detail.
- The company could not be immediately reached for comment.
Context: Founded in 2017, Luckin Coffee is challenging Starbucks in China as it strives to popularize coffee in tea-loving China. It leverages technology to drive a focus on convenience and low prices. Users can order coffee on its app and pick up drinks in its stores.
- Luckin Coffee gained notoriety in 2019, using steep discounts and promotions to lure customers while rapidly expanding its store network.
- Its US IPO in May 2019 raised $651 million, close to the amount that the new shares and bonds will raise for Xiamen-based company, Norris said. “For Luckin’s proponents, the raise is a way to keep their foot on the gas and expand to more consumption occasions through the vending machine format,” he added.
- Within a year of its seed round in April 2018, Luckin Coffee completed another three funding rounds, raising $550 million, according to startup intelligence website Crunchbase.
- Luckin Coffee’s stores are characteristically small in footprint and operate with minimal staff.
- Investors and analysts have questioned whether its strategy of burning cash on discounts and running consecutive losses is an effective tactic to entice Chinese customers away from the Starbucks brand.
- In November 2019, the startup posted narrowed losses for the third quarter, showing an improved cost strategy. Its stock shot up by 68% in the period following the release of its Q3 results and until the end of 2019.