瑞幸咖啡投资研究报告-雪湖资本2022.11-81正式版

LuckinCoffee(LKNCYUS)FullInvestmentMemo(FIM)Date:Aug14,2022SharePrice:US$14.52MarketCap:US$4,609m30/60/90DaysADV(US$):US$31.5m/US$27.1m/US$23.7mRecommendation:LongTargetPrice:US$46.25/TargetMarketCap:US$14.7bnIRR(Aug2022–Dec2023):131%TableofContentsDisclaimer2ExecutiveSummary3Section1:CompanyBackground7Section2:IndustryOverview15Section3:CoreThesisandRisks17Module1:IncrementalTAM(totaladdressablemarket)ofcoffeeindustrycreatedbybeveragedcoffee17ThesisNo.1:BeveragedcoffeeenlargedcoffeeindustryTAMsignificantly17ThesisNo.2:ThebeveragedcoffeecategoryhasmoresimilarattributesascoffeeandwesternQSRwhereleadingbrandstakeadvantageofstableandloyalcustomerbehaviorstobuildlong-termmoatsandislesssimilartothefreshlymadeteadrinkcategory.Luckin’spotentialrouteofsuccessinthiscategoryliesinattractingandretainingnewbeveragedcoffeecustomersusingitscompetitivestrengthsandconvertingthemintoloyalcoffeedrinkers26Module2:EvolutionofLuckin’sbusinessmodel32ThesisNo.3:Evolutionofself-operatedstoreUEofraisingsalesvolumeandeffectivesellingpriceatthesametime,supportedbyattractivebeveragedcoffeeproductsratherthandiscount32ThesisNo.4:ThefranchisemodeloffersdecentreturntobothfranchiseesandLuckinitselfinlowertiercities;Luckinhasthepotentialtofurtherincreaseitsgrossprofitsharingratiowithfranchiseesasthecurrentfranchiseereturnisaboveindustry-average35ThesisNo.5:ThehighSame-storeSalesGrowth(SSSG)from2021to1H22isexpectedtobenormalizedinthefutureandwillmainlybedrivenbytheincreaseinpurchasefrequencyinthemid-to-longterm42ThesisNo.6:Operatingleverageofheadquarter-levelexpenseswillleadtoconstantcompany-levelmarginimprovement47NeutralNo.1:Non-corebusinessessuchasteadrinks,lightmealsandsnacksareunlikelytocontributesignificantrevenueorprofitintheneartermandarenotmanagement’scurrentfocus49Module3:Luckin’scompetitiveadvantagesandcompetitivelandscapeanalysis50ThesisNo.7:Awell-balancedindustryleadersupportedbyeconomiesofscale,productR&Dcapability,brandpower,supplychain,digitalizationandoperatingefficiency,aswellassignificantfirst-moveradvantageinlowertiercities50RiskNo.1:Intensifyingcompetitioninthebeveragedcoffeesegment58Module4:OtherRisks70RiskNo.2:NegativeimpactfromtheimpactofCovid-1970Section4:Management72Section5:Ownership74Section6:Expectation76Section7:ValuationandIRR77Section8:Technical79Section9:ESG811DisclaimerSnowLakecurrentlyhasalongpositioninLuckinCoffeeInc.stocks(OTCLKNCY).SnowLakemayprofitifthetradingpriceofLuckinCoffeeInc.securitiesgoesupandmaylosemoneyifthetradingpriceofsecuritiesofLuckinCoffeeInc.decreases.SnowLakemaychangeitsviewsaboutoritsinvestmentpositionsinLuckinCoffeeInc.atanytime,foranyreasonornoreason.SnowLakemaybuy,sell,coverorotherwisechangetheformorsubstanceofitsLuckinCoffeeInc.investment.SnowLakedisclaimsanyobligationtonotifythemarketofanysuchchanges.Theinformation,analysisandopinionsexpressedinthispresentation(the“Presentation”)arebasedon,amongotherthings,publiclyavailableinformationaboutLuckinCoffeeInc.,third-partybuy-sideorsell-sideresearch,ourownduediligence,andinferencesanddeductionsthroughouranalysis.SnowLakedoesnotguaranteeinanywaythatitisprovidingalloftheinformationthatmaybeavailable.SnowLakerecognizesthattheremaybenon-publicinformationinthepossessionofLuckinCoffeeInc.orothersthatcouldleadLuckinCoffeeInc.orotherstodisagreewithSnowLake’sanalyses,conclusionsandopinions.ThePresentationmayincludeforward-lookingstatements,estimates,projectionsandopinionspreparedwithrespectto,amongotherthings,certainlegalandregulatoryissuesLuckinCoffeeInc.facesandthepotentialimpactofthoseissuesonitsfuturebusiness,financialconditionandresultsofoperations,aswellas,moregenerally,LuckinCoffeeInc.’santicipatedoperatingperformance,accesstocapitalmarkets,marketconditions,assetsandliabilities,aswellasofthoseofLuckinCoffeeInc..Suchstatements,estimates,projectionsandopinionsmayprovetobesubstantiallyinaccurateandareinherentlysubjecttosignificantrisksanduncertaintiesbeyondSnowLake’scontrol.AlthoughSnowLakebelievesthePresentationissubstantiallyaccurateinallmaterialrespectsanddoesnotomittostatematerialfactsnecessarytomakethestatementsthereinnotmisleading,SnowLakemakesnorepresentationorwarranty,expressorimplied,astotheaccuracyorcompletenessofthePresentationoranyotherwrittenororalcommunicationitmakeswithrespecttoLuckinCoffeeInc.,andSnowLakeexpresslydisclaimsanyliabilityrelatingtothePresentationorsuchcommunications(oranyinaccuraciesoromissionstherein).Thus,shareholdersandothersshouldconducttheirownindependentinvestigationandanalysisofthePresentationandofLuckinCoffeeInc.andothercompaniesmentioned.SnowLakerecommendsthateveryinvestorconductitsownduediligencebeforebuyingorsellinganysecurity.ThePresentationisnotinvestmentadviceorarecommendationorsolicitationtobuyorsellanysecurities.Exceptwhereotherwiseindicated,thePresentationspeaksasofthedatehereof,andSnowLakeundertakesnoobligationtocorrect,updateorrevisethePresentationortootherwiseprovideanyadditionalmaterials.SnowLakealsoundertakesnocommitmenttotakeorrefrainfromtakinganyactionwithrespecttoLuckinCoffeeInc.oranyothercompany.Asusedherein,excepttotheextentthecontextotherwiserequires,SnowLakeincludesitsaffiliatesanditsandtheirrespectivepartners,directors,officersandemployees.2ExecutiveSummaryLuckinCoffee’sturnaroundisamiracleinChina’sbusinesshistoryAfteritsself-reportedfabricationoftransactionsinApr2020,LuckinwentthroughaseriesofsignificantcorporateeventsincludingdelistingfromNasdaq,partingwithandfightingoffcome-backattemptsofformermanagement,corporategovernancerestructuring,goingthroughandemergingfromprovisionalliquidation,settlinginvestigationsfromSECandotherregulatorybodies,settlingclassactionlawsuits,etc.Atthesametime,thenewmanagementmanagedtorestructureandturnaroundthebusinessfundamentalsofthecompany,turningitfromcash-burningtoprofit-generatinginlessthantwoyears.ThefactthatLuckincanturnarounditsbusinessinsuchashorttimeunderthemostdifficultcircumstancesisnearlyabusinessmiracle.Wethinktheturnaroundisamixtureofgreateffortsandluck,summarizedbyanoldsayinginChina“favorabletiming,geographicalandhumanconditions”(天时地利人和):Righttiming(天时):Covid-19actuallybenefitedLuckin’sgrab-and-gostoremodeltotakesharefromdominantplayerssuchasStarbuckswho’susinga“thirdplace”model,whichwasmoreheavilyimpactedbythepandemicUnderstandingoflocalmarket(地利):basedondeepunderstandingofChina’scoffeeindustry,Luckininventedbeveragedcoffeeandintroducedittothecoffeeindustry,whichenlargedtheTAMsignificantlyandmadelowertiercitiesaccessibletothecoffeechains.Luckinisusingfranchisemodeltopenetratelowertiercitiesefficientlyandbuiltasignificantfirst-moveradvantagethereRightpeople(人和):CenturiumCapitalbecamethecontrollingshareholderofthecompany,helpingthenewmanagementteamrestructurethecompanythoroughly.Thenewmanagementteamchoseadifferentdirectionfromtheformermanagement.Insteadofpursuingaggressivestoreexpansionand“newretail”model,itbecamelaserfocusedonbuildingsoundofflinebusinessfundamentals,optimizingstorenetwork,investinginR&DandconductingeffectivemarketingcampaignsleveragingdataandtechnologyThebiggestcontributorandwinnerofLuckin’sturnaroundCenturiumCapitalturnedouttobethebiggestwinnerofLuckin’sbusinessturnaround.BelowisasummaryofCenturium’shistoryofinvestinginandsellingsharesofthecompany:InvestedUS$178mintworoundsofprivatefinancingofLuckinin2018toget23.6mClassBADSatthepurchasingpriceofUS$5.87andUS$11.75,respectivelySold5.5mADSatUS$42.00perADSinJan2020concurrentlywithLuckin’sfollow-onoffering.CenturiumrealizedUS$54mnetprofitafterdeductingallofitsinitialinvestmentbeforeSupportedthenewmanagementteamtoreplaceandpartwiththeformermanagementandtherestructuringofthecompanyafterself-reportedfabricationoftransactions.SignedinvestmentagreementtoinvestUS$240minthecompanyinApr2021andclosedthetransactioninDec2021,purchasepriceUS$6.50perLedabuyerconsortiumtopurchasesecondarysharesfromtheformermanagementduetotheliquidationoftheircontrolledentitieswithpurchasingpriceofUS$8.76perADS.BecamethecontrollingshareholderofthecompanyandplacedthreerepresentativesontheboardinMay2022TheaveragecostofCenturiumCapital’sholdingof83.5mADSinthecompanyisUS$5.21Centurium’sunrealizedprofitwasUS$777mattheclosingpriceofUS$14.52/ADSonAug12,2022.IfapplyingourtargetpriceofUS$46.25withatargetmarketcapofUS$14.7bn,CenturiumwouldhaveanunrealizedprofitofUS$3.4bn,agenerouspayofftothegreateffortaswellastherisktakenbythefundanditssupportiveLPs.ActionClosingdateEventNo.ofADS(m)PriceAmountAccumulated(investment)profitAccumulatedAvg.costClassAClassBClassA+BBalance:ClassA+BUSD/ADSUS$mUS$mUSD/ADSBuyJun-2018SeriesA17.017.017.05.87(100)(100)5.87BuyNov-2018SeriesB6.66.623.611.75(78)(178)7.52SellJan-2020Sellsecondary(5.5)(5.5)18.142.0023254(3.00)BuyDec-2021Preferredseniorshares36.936.955.06.50(240)(186)3.38BuyJan-2022Buysecondary28.528.583.58.76(250)(436)5.21Balance65.418.183.5(436)5.21Source:Filings3Corethesiscomparisonwith2020shortreport2020ShortReport2022FullInvestmentMemo(FIM)TAMofcoffeeBusinessModelFlaw#1:Luckin’sThesis#1:BeveragedcoffeeenlargedtheindustrypropositiontotargetcorefunctionalcoffeeTAM(totaladdressablemarket)ofChinademandiswrong.Themarketofcorecoffeeindustrysignificantly.functionalcoffeeproductinChinaissmallandmoderatelygrowing.Luckin’scoffeeBusinessModelFlaw#2:Luckin’sThesis#3:Evolutionofself-operatedstorebusinessmodelcustomersarehighlypricesensitiveandUEofraisingsalesvolumeandeffectiveretentionisdrivenbygenerouspricesellingpriceatthesametime,supportedbypromotion;Luckin’sattempttodecreaseattractivebeveragedcoffeeproductsratherdiscountlevel(i.e.,raiseeffectiveprice)thandiscount.andincreasesamestoresalesatthesametimeismissionimpossible.Thesis#5:ThehighSame-storeSalesGrowth(SSSG)from2021to1H22isBusinessModelFlaw#3:Flawedunitexpectedtobenormalizedinthefutureandeconomicsthathasnochancetoseeprofit:willbemainlydrivenbyincreaseinLuckin’sbrokenbusinessmodelisboundpurchasefrequencyinthemid-to-longtocollapse.term.Thesis#6:Operatingleverageofheadquarter-levelexpenseswillleadtoconstantcompany-levelmarginimprovement.Luckin’snon-BusinessModelFlaw#4:Luckin’sdreamNeutral#1:Non-corebusinessessuchascoffeebusiness“tobepartofeveryone’severydaylife,teadrinks,lightmealsandsnacksarestartingwithcoffee”isunlikelytocomeunlikelytocontributesignificantrevenuetrue,asitlackscorecompetenceinnon-orprofitintheneartermandarenotcoffeeproductsaswell.management’scurrentfocus.ThesisandrisksuniqueinthisreportThesis#1:GrowthpotentialandprofitcontributionfromfranchisestoresinlowertiercitiesTheintroductionofbeveragedcoffeecreatesgreatpotentialforLuckin’sstoreexpansioninlowertiercitiesThefranchisemodeloffersadecentreturntobothfranchiseesandLuckinitselfinlowertiercities;Luckinhasthepotentialtofurtherincreaseitsprofit-sharingratiowithfranchiseesasthecurrentreturnprofileforfranchiseesisaboveindustry-averageThesis#2:ThebeveragedcoffeecategoryhasmoresimilarattributestocoffeeandwesternQSR(QuickServiceRestaurant),whereleadingbrandstakeadvantageofstableandloyalcustomerbehaviorstobuildlong-termmoats,butitislesssimilartothefreshlymadeteadrinkcategory.Luckin’spotentialroutetosuccessinthiscategoryliesinattractingandretainingnewcustomersofbeveragedcoffeeusingitscompetitivestrengthsandconvertingthemintoloyalcoffeedrinkersThesis#7:Awell-balancedindustryleadersupportedbyeconomiesofscale,productR&Dcapability,brandpower,supplychain,digitalizationandoperatingefficiency,aswellasasignificantfirst-moveradvantageinlowertiercitiesRisk#1:IntensifyingcompetitioninthesegmentofbeveragedcoffeeAmongalltypesofcompetitors,werecognizetheindependentcoffeebrandslaunchedbyfranchiseteashopsasLuckin’smajorthreatinthenext3-5years,astheyalsoofferaffordablebeveragedcoffeeandwillcompetewithLuckindirectlyinlowertiercities.Theyhaveexperiencesfromandsynergieswithexistingteadrinkbusiness.Moreimportantly,theyareabletoscaleupquicklyinallcitytiersbyfranchisemodelWedon’tseeothertypesofcoffeebrandshavethepotentialtochallengeLuckin’sleadingpositionintheshort-to-mediumterm.Theyeitherdon’trealizethetrendofbeveragedcoffeeorcannotbuildasizablestorenetworktochallengeLuckin’sleadingpositioninlowertiercitiesRisk#2:NegativeimpactfromtheimpactofCovid-19BenchmarkoftransactingstockpricesinkeyeventsOfferingtoCenturiumCapitalandJoyCapitalin2021:PriceUS$6.50/ADS,CenturiumCapitalinvestedUS$240minthecompany(36.9mADS)andJoyCapitalinvestedUS$10m(1.5mADS).Theinvestment4agreementwassignedinApr2021,andthetransactionswereclosedinDec2021forCenturiumCapitalandJan2022forJoyCapital.SecondarysharepurchasebyaCenturiumCapitalledbuyerconsortiumthatalsoincludesIDGCapitalandAresSSGCapitalManagement:PriceUS$8.76/ADS.Thebuyerconsortiumpurchased47.9mADSwithUS$420mintotal.ThedealwasinitiallyproposedinJun2021andthepricewasfinalizedinAug2021,thenthedealwasclosedinJan2022.ADSissuedaspartofrestructuringofthe2025convertibleseniornotes:equivalenttopriceUS$10.98/ADS.InexchangefortheUS$460m2025convertibleseniornotes,thecompanyissuedaconsiderationofUS$245.5mofcash,US$109.9mof9.00%seriesBseniorsecurednotesdue2027(notconvertible)and9.53mADSs(ADSsequivalenttoUS$104.6m).TheSchemeofArrangementswaslaunchedinSep2021andbecameeffectiveinJan2022.ValuationandIRRBasedonclosingpriceofUS$14.52onAug12,2022,Luckin’smarketcapisUS$4,609m,with10%ofmarketcapinnetcash.Thestockistradingat25x,15xand11xP/Ein2022Eto2024E,and0.4xand0.4xPEGin2023Eto2024E.Applying35x2024P/Efor2023year-endvaluation(implied20xP/Ein2027-2028Ewhenitsnetprofitgrowthisstable),targetmarketcapwillreachUS$14.7bn,218%upsidefromcurrentmarketcap,andIRRofholding1.5yearsis131%.TargetpriceisUS$46.25perADS.Asensitivityanalysisbasedon2024P/Eisasfollows.2024P/E20x25x30x35x40x45x50xTargetmarketcap(US$m)8,38810,48512,58214,67916,77618,87320,969Targetstockprice(US$)26.4333.0339.6446.2552.8559.4666.07IRRofholdingtoyearend202354%81%107%131%155%178%200%BasedontheIRRcalculationandhighconvictionlevel,coupledwiththehighlikelihoodofup-listingtoUSmainboardin2H22or1H23,werecommendalongposition.Themaintechnicalrisksaretheuncertaintyintimingoftheup-listingandthegeneralADRdelistingrisk,aswellasthesellingpressurefromthecontrollingshareholder’s27.5%holding.5CaseStudy:TheintroductionofhighballstimulatedtheconsumptionofwhiskyinJapanHighballisamixtureofwhiskyandcarbonatedwater.TheJapanesehavebeenmakingwhiskysincethe1920s.Beforetheintroductionofhighball,Whiskywasmainlyconsumedintheformofwhiskyneat(纯饮)orwhiskyontherocks(加冰)asaluxurydrinkinpubs.ThefirstwaveofJapanesehighballcameinthe1950s,transformingwhiskeyintoanalcoholicbeverage.Highballnotonlyincreasedtheadoptionofwhiskybyabroadercustomerbase,butalsoexpandeditsconsumptionscenariofrompubstoizakaya(居酒屋)andrestaurants.Itisnotsuitabletodrinkwhiskystraightwhilehavingameal,buttheadditionofthesodawatertempersitsstrengthandmakesitenjoyabletohavewithfood.Highballbecameanimportantgrowthdriverofwhisky’sgoldenageinJapanfrom1950sto1980s.Thetotalannualconsumptionofwhiskyincreasedfromlessthan50mlitersin1955tothepeakat~400mlitersin1983beforetheeconomicrecession.Theresurgenceofwhiskywasalsodrivenbyhighball.Since2008,Suntory(amajorJapanesewhiskydistiller)spearheadedadedicatedhighballcampaignwhichhelpedstartnew“highballboom”inJapanwithadesiretorecruitanewgenerationofwhiskydrinkers.Itconvincedmoreizakayatoaddhighballstotheirmenusandthenumberofizakayawithhighballonmenugrewenormouslyfrom15kin2008to40kin2009accordingtoSuntory.Suntoryalsodevisedequipmenttodispensepremixedhighballsontapandlaunchedcannedversionsofhighballinconveniencestores.Today’syoungpeopleappreciatethislower-alcoholoptionforwhiskythatallowsthemtoenjoytheflavorsofwhiskywithoutsippingitstraightandcontinuetodrinkitwiththeirmeals.ThetotalannualconsumptionofwhiskyinJapanrecoveredfrom~100mlitersin2008to~150mlitersin2015.TotalconsumptionofwhiskyinJapan10mlitersHighballcontributedtothegoldenageofwhiskyduring1960s-1980sResurgencedrivenbyhighballSource:NationalTaxAgencyofJapan6Section1:CompanyBackgroundCorporateHistorybeforetheSelf-ReportedFabricationofTransactionsLuckinCoffeewasfoundedbyLUZhengyaoandQIANZhiyain2017.LUZhengyaowasthefounderofCARInc(formerly699HK)andUCARInc(formerly838006CH),andQIANZhiyaworkedforhiminthosecompanies.LuckinCoffeeopeneditsfirsttrialstoreinBeijinginOct2017,andquicklyexpandedtoachainof2,073self-operatedstoresbytheendof2018afterseveralroundsofprivatefund-raising.No.ofstoresTotalSelf-ownedFranchisedSource:Filings

2017201820192020202192,0734,7894,8036,02492,0734,5073,9294,3972828741,627InApr2019,thecompanysecuredB-1roundoffund-raisingjustbeforeitsIPO.OnMay17,2019,itwentIPOonNasdaqwithacon-currentofferingtoLouisDreyfusCompany,astrategicinvestor.TheIPOpricewasUS$17.00,whichvaluedthecompanyatamarketcapofUS$4.1bn.Withinlessthantwoyearsofcommencingoperation,theIPOofLuckinCoffeewasknownasoneofthefastestamongChinesecompanies.AfterIPO,thecompanycontinueditsaggressivestoreexpansionanddelivereditsstoreopeningtargetof4,500self-operatedstoresbytheendof2019.Atthattime,theformermanagementalsotargetedtoreach10,000self-operatedstoresbytheendof2021.Italsolauncheditsfranchisestoremodelwithanew“LuckinTea”brandinSep2019andopeneditsfirstfranchisestoreinOct2019.OnJan7,2020,thecompanyannouncedproposedfollow-onequityofferingof7.2mADSandofferingofUS$400mconvertibleseniornotes.Italsoannounceditsunmannedretailstrategy,planningtoput“LuckinCoffeeExpress”unmannedcoffeemachinesand“LuckinPopMini”vendingmachinesonthemarket.Therewasoverwhelmingdemandforthefollow-onofferingandconvertibleseniornotes,andthecompanyupsizedtheADSofferingfrom7.2mto9.0m,andboththeADSofferingandtheconvertibleseniornotesofferinghadfull-exerciseofgreen-shoeoptions.OnJan17,2020,thecompanyclosedbothofferings.TheofferingpricefortheADSwasUS$42.00,andtheconversionpricefortheseniornoteswasUS$54.60perADS.CenturiumCapitalsoldsecondarysharesof5.52mADS(incl.0.72mgreenshoe)concurrentlywiththeoffering.OnApr2,2020,thecompanyannouncedtheformationofthespecialcommitteeoftheboardtooverseetheinternalinvestigationintopotentialfraudulentwrongdoingsofcertainexecutives,whichinflatedtherevenuefrom2Q19to4Q19byRMB2.2bn.Certaincostsandexpensesduringtheperiodweresubstantiallyinflatedtoo.OnJul1,2020,thecompanyannouncedtheresultsoftheinvestigationbythespecialcommittee.ComparisonbetweentheRestatementsofFinancialsand2020ShortReportEstimatedRealcaseBasedontheannouncementsoftheinvestigationresultsonJul1,2020,thecompanyinflatedtherevenuefrom2Q19to4Q19byRMB2.12bnor83%oftherealcase,andthecostsandexpensesbyRMB1.34bnor26%.Asaresult,thepre-taxlosswasunderstatedbyRMB780mor30%.Belowisthequarterlybreakdownofthemisstatement,andthescaleofthefraudenlargedquarterbyquarterfrom2Q19to4Q19:revenuewasinflatedby38%,83%and111%in2Q19,3Q19and4Q19,respectively.7rmbm191Q192Q193Q194Q2Q19-4Q19Fraudcase:Revenue4789031,5432,2204,666Y/Ygrowth643%541%377%464%Costsandexpenses1,0301,5612,0862,8476,494Pre-taxprofit(loss)(552)(657)(543)(627)(1,827)Realcase(Companyrestated)Revenue4786538431,0502,546Y/Ygrowth438%250%126%208%Costsandexpenses1,0301,4111,5662,1775,154Pre-taxprofit(loss)(552)(757)(723)(1,127)(2,607)Overstated:Revenue2507001,1702,120Costsandexpenses1505206701,340Pre-taxprofit(loss)100180500780Overstatementas%ofrealcaseRevenue38%83%111%83%Costsandexpenses11%33%31%26%Pre-taxloss-13%-25%-44%-30%Source:FilingsThecompany’sIPOwasinMay2019,anditsfinancialresultsfrom2017to1Q19wereauditedbyE&YintheIPOprocess.TheinvestigationresultsshowedthatthecompanybeganitsfraudulentwrongdoingsrightbeforeIPOinApr2019.Thestockpricereactedpositivelytoits3Q19quarterlyresultsand4Q19guidance,inproportiontothescaleofitsfraud.2Q19 3Q19results resultsWefurthercomparedtheimpliedoperatingmetricsandcertainexpenseitemsofcompanyfilingswiththerealcaseinthe2020shortreport.Therestatementsarefarbelowthefraudcase,butquiteclosetotherealcasein2020shortreport.Thus,wethinkthecompany’srestatementsoffinancialstrulyreflectedthecompany’shistoricalfinancialperformance.84Q19ComparisonFraudcaseRealcase(Companyrestated)MWreportrealcaseNo.ofitemsperstoreperday495265263Actualpriceperitem(incl.freeitems,rmb)11.89.810.0Otherproductsitemsas%oftotal22%10%6%2019ComparisonFraudcaseRealcase(FocusMediaclarification)MWreportrealcaseAdvertisingexpenseonFocusMedia(rmbm)675221236Source:LuckinandFocusMediafilings,2020shortreportTheSECcomplaint,consentanddraftfinaljudgementfileinDec2020describedhowthecompanyfabricatedtherevenueandcostrecords:Executiveofficersandseniormgmt.createdafakeoperationsdatabasethatincludedbothlegitimateordersandfabricatedordersandalteredbankrecordstohidetheirmisconductfromLuckin’sFinanceDepartment.InflatedrevenuebyRMB2.12bnbyfabricatinginretailsalestransactionsthrough3separatefraudulentschemes,ofwhichthe3rdschemeaccountedfornearly90%oftheinflatedrevenue:o1stscheme:LuckinfabricatedcouponsalestopurportedindividualcustomersbeginninginApr2019,andthencreatedfakecustomerorderstoredeemthecoupons,fabricatingsalesofseveralmillionsofUSDo2ndscheme:Luckinfabricatedcouponsalesto4purportedcorporatecustomersbeginninginMay2019,andthencreatedfakeretailcustomerorderstoredeemthecoupons,fabricatingsalesoftensofmillionsofUSD,nearlytripletheamountinthe1stschemeo3rdscheme:Luckinfabricatedcouponsalesto3rdpartyshellcompanies-purportedintermediaryagentsthatwouldresellcouponstoindividualcustomers(the“FictitiousAgents”)beginninginMay2019,andthencreatedfakeretailcustomerorderstoredeemthecoupons,fabricatingsalesofhundredsofmillionsofUSD,nearly90%ofthefabricatedrevenue.7fundingcompaniestransferredmoneytoLuckinandLuckinalteredbankstatementssothatthefundsappearedtooriginatefromtheFictitiousAgentsLuckinalsoinflateditscostsandexpensesbyRMB1.34bninparttomaskthefabricatedsalesandinparttoreturnmoneyusedintheshamsales.ItreturnedfundstothefundingcompaniesbothdirectlythroughbanktransfersandindirectlythroughfabricatedexpensespaymentstovendorsoLuckinmadepaymentsto13purportedsuppliersofrawmaterialsthatdidnotprovideanymaterialstoLuckinoLuckinoverpaid2providersofhumanresources(outsourcing)servicesoLuckinpaiddeliveryfeesto3companiesthatdidnotprovideanyservicetoLuckinoInMarchandApril2020,LuckincontinuedreturningmoneytothefundingcompaniesNotethattheadvertisingspendingonFocusMediaorotheradvertisingvendorsisnotmentionedinfabricatingcostsandexpenses.Luckincouldhaveinflatedotheritemswithinthesalesandmarketingexpenses,notadvertisingexpenses.Astheydon’tdisclosequarterlysalesandmarketingexpensebreakdown,theformermanagementusedFocusMediaasanexplanationfortheincreaseinsalesandmarketingexpensesintheirverbalcommunicationwithinvestorsandanalysts.HowtheCompanyEmergedfromtheLiquidationandOtherLegalProceeding