Shares of Luckin Coffee Inc. (LK) plummeted 54% on June 26 as news emerged that the shares would cease to be part of Nasdaq as of June 29. This is my third and probably last update on this troublesome Chinese coffee retailer that still promises to become China’s Starbucks (NASDAQ: SBUX). In my first article published in April, I suggested that investors who bought Luckin Coffee stock at as high as around $ 50 should look forward to a better opportunity to liquidate their positions. Once the stock skyrocketed in the days following the resumption of trading, I published my second piece warning investors of the awaiting catastrophe, and hinted that the stock could lose most of its value before the end of June. as the drama of exclusion unfolds. Luckin Coffee’s management decided to withdraw its request for a hearing in front of a Nasdaq panel in which company executives were supposed to allow the shares to be listed on Nasdaq despite admitting that they reported fictitious earnings. The saga is now ending, as expected, with the eventual exclusion of Nasdaq’s Luckin Coffee. In this article, I will answer some pressing questions about the future of the company and suggest the best course of action for an investor who still believes in the success of Luckin Coffee.
What happens to the shares of Luckin Coffee once the company withdraws from Nasdaq?
June 26 was the last day for investors to exchange Luckin Coffee shares on Nasdaq. When trading begins on Monday, June 29, the company will no longer be part of the prestigious Nasdaq Index. As I noted on many forums, investors are confused about their ownership of the company. In fact, the common stockholders would still own the company. Luckin Coffee’s shares will continue to be listed on the OTC market just like many other famous companies like Tencent Holdings Limited (OTCPK: TCEHY).
Will Luckin Coffee trade the same symbol?
No. Generally, OTC issuers use four or five letters as a ticker. Luckin Coffee is likely to have five letters in its new symbol, and the fifth letter is, in fact, an additional letter used to describe the issuer of the estate. For example, the letter “P” indicates preferred stocks. Under the OTC market listing system, Luckin Coffee is likely to use the letter “Y” as the fifth letter to indicate that the list is from a US Depository Receipt.
Why did the company decide to withdraw your hearing request?
Right now, I can only make an educated guess. However, before doing so, I encourage readers to take this as my opinion on the matter, which could be inaccurate.
First, there would have been no reason for management to back down on its decision to request a hearing if the company had a concrete argument to present to the panel. The decision to withdraw the application and accept defeat, therefore, is an admission of guilt for what I see. This inability to defend itself continues to highlight the importance of the accounting scandal.
Secondly, I believe this decision could have been made after carefully considering the regulatory benefits associated with OTC markets. Here is a snapshot of the reporting requirements applicable to companies trading on the OTC market.
“Many companies are not subject to SEC registration requirements and therefore do not conduct regular financial reporting and other corporate events with the SEC. Companies are not required to provide financial information to OTC Markets Group; however However, in order for investors to make informed business decisions, many companies choose to provide disclosure. “
This is not good news for investors. We are talking about a company that cooked its books at a time when the company was legally required to comply with the SEC reporting requirements. While I don’t even remotely suggest that the company continue its bad practices in the future, there is no denying that investors would be exposed to significant regulatory risk once Luckin Coffee enters the OTC market.
What if an investor remains optimistic about the company despite the many warning signs?
The wisest decision, from what I see, is to avoid this company entirely. However, after scrolling through many discussion forums, some investors continue to have hope for some unknown reason. These investors, in my opinion, would be better off waiting for Luckin Coffee shares to fall on the OTC market before opening a long position, if they do. Existing investors, on the other hand, should confirm with their broker or platform whether trading in equity securities is allowed in the OTC market.
The new start
The new beginning will be difficult for both the company and its shareholders. The company has yet to face litigation issues in China, and the fines could reach millions of dollars, assuming Chinese regulators decide to punish the company for its bad practices. From a market perspective, the traded volume is likely to decrease significantly in the coming weeks as investors leave this company forever. If the risk of a second wave of COVID-19 infections materializes in China, Luckin Coffee could succumb to fines and store closings and eventually declare bankruptcy as well. I wouldn’t leave this as a possibility right now.
To carry out
I don’t want to do anything with Luckin Coffee. From what I see, there are plenty of lucrative opportunities out there, so taking the added risk of betting my capital on a company that has demonstrated its ability to report fictional income does not bode well for me. To make matters worse, I think the withdrawal of the scheduled hearing in front of the Nasdaq listing committee is an admission of guilt. Going one step further, I think (opinion, not a fact) that Luckin Coffee executives are seeking refuge from regulatory requirements and non-existent reports related to companies trading in the OTC market, which serves as a warning sign of more problems in the future. In case you see something I don’t see and are interested in investing in Luckin Coffee, it seems too early to do so. By holding your investment for a couple of weeks, I think you would get a better deal as stocks will only drop in the coming weeks as investors embrace the new reality.
On a parting note, I think the most suitable OTC symbol for Luckin Coffee is UNLKY. This will serve as a warning sign for investors before they decide to gamble the hard-earned money on a struggling company.
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Divulge: I / we have no positions in any mentioned action, and we have no plans to initiate any positions within the next 72 hours. I wrote this article myself and express my own opinions. I am not receiving compensation for it (other than Seeking Alpha). I have no business relationship with any company whose shares are mentioned in this article.