瑞幸咖啡投资研究报告-雪湖资本2022.11

1LuckinCoffee(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%ontentsDisclaimer 2ExecutiveSummary 3Section1:CompanyBackground 7Section2:IndustryOverview 15Section3:CoreThesisandRisks 17Module1:IncrementalTAM(totaladdressablemarket)ofcoffeeindustrycreatedbybeveragedcoffee17ThesisNo.1:BeveragedcoffeeenlargedcoffeeindustryTAMsignificantly 17ThesisNo.2:ThebeveragedcoffeecategoryhasmoresimilarattributesascoffeeandwesternQSRwhereleadingbrandstakeadvantageofstableandloyalcustomerbehaviorstobuildlong-termmoatsandislesssimilartothefreshlymadeteadrinkcategory.Luckin’spotentialrouteofsuccessinthiscategoryliesinattractingandretainingnewbeveragedcoffeecustomersusingitscompetitivestrengthsandconvertingthemintoloyalcoffeedrinkers 26Module2:EvolutionofLuckin’sbusinessmodel 32ThesisNo.3:Evolutionofself-operatedstoreUEofraisingsalesvolumeandeffectivesellingpriceatthesametime,supportedbyattractivebeveragedcoffeeproductsratherthandiscount 32ThesisNo.4:ThefranchisemodeloffersdecentreturntobothfranchiseesandLuckinitselfinlowertiercities;Luckinhasthepotentialtofurtherincreaseitsgrossprofitsharingratiowithfranchiseesasthecurrentfranchiseereturnisaboveindustry-average 35ThesisNo.5:ThehighSame-storeSalesGrowth(SSSG)from2021to1H22isexpectedtobenormalizedinthefutureandwillmainlybedrivenbytheincreaseinpurchasefrequencyinthemid-to-longterm 42ThesisNo.6:Operatingleverageofheadquarter-levelexpenseswillleadtoconstantcompany-levelmarginimprovement 47NeutralNo.1:Non-corebusinessessuchasteadrinks,lightmealsandsnacksareunlikelytocontributesignificantrevenueorprofitintheneartermandarenotmanagement’scurrentfocus 49Module3:Luckin’scompetitiveadvantagesandcompetitivelandscapeanalysis 50ThesisNo.7:Awell-balancedindustryleadersupportedbyeconomiesofscale,productR&Dcapability,brandpower,supplychain,digitalizationandoperatingefficiency,aswellassignificantfirst-moveradvantageinlowertiercities 50RiskNo.1:Intensifyingcompetitioninthebeveragedcoffeesegment 58Module4:OtherRisks 70RiskNo.2:NegativeimpactfromtheimpactofCovid-19 70Section4:Management 72Section5:Ownership 74Section6:Expectation 76Section7:ValuationandIRR 77Section8:Technical 79Section9:ESG 812DisclaimerSnowLakecurrentlyhasalongpositioninLuckinCoffeeIncstocksOTCLKNCYSnowLakemayprofitifthetradingpriceofLuckinCoffeeInc.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.3ActionActionClosingdateEventNo.ofADS(m)ClassAClassBClassA+BBalance:ClassA+BExecutiveSummaryLuckinCoffee’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,whichwasmoreheavilyimpactedbythepandemic•Understandingoflocalmarket(地利):basedondeepunderstandingofChina’scoffeeindustry,Luckininventedbeveragedcoffeeandintroducedittothecoffeeindustry,whichenlargedtheTAMsignificantlyandmadelowertiercitiesaccessibletothecoffeechains.Luckinisusingfranchisemodeltopenetratelowertiercitiesefficientlyandbuiltasignificantfirst-moveradvantagethere•Rightpeople(人和):CenturiumCapitalbecamethecontrollingshareholderofthecompany,helpingthenewmanagementteamrestructurethecompanythoroughly.Thenewmanagementteamchoseadifferentdirectionfromtheformermanagement.Insteadofpursuingaggressivestoreexpansionand“newretail”model,itbecamelaserfocusedonbuildingsoundofflinebusinessfundamentals,optimizingstorenetwork,investinginR&DandconductingeffectivemarketingcampaignsleveragingdataandtechnologyThebiggestcontributorandwinnerofLuckin’sturnaroundCenturiumCapitalturnedouttobethebiggestwinnerofLuckin’sbusinessturnaround.BelowisasummaryofCenturium’shistoryofinvestinginandsellingsharesofthecompany:oInvestedUS$178mintworoundsofprivatefinancingofLuckinin2018toget23.6mClassBADSatthepurchasingpriceofUS$5.87andUS$11.75,respectivelyoSold5.5mADSatUS$42.00perADSinJan2020concurrentlywithLuckin’sfollow-onoffering.CenturiumrealizedUS$54mnetprofitafterdeductingallofitsinitialinvestmentbeforeoSupportedthenewmanagementteamtoreplaceandpartwiththeformermanagementandtherestructuringofthecompanyafterself-reportedfabricationoftransactions.SignedinvestmentagreementtoinvestUS$240minthecompanyinApr2021andclosedthetransactioninDec2021,purchasepriceUS$6.50perADSoLedabuyerconsortiumtopurchasesecondarysharesfromtheformermanagementduetotheliquidationoftheircontrolledentitieswithpurchasingpriceofUS$8.76perADS.BecamethecontrollingshareholderofthecompanyandplacedthreerepresentativesontheboardinMay2022oTheaveragecostofCenturiumCapital’sholdingof83.5mADSinthecompanyisUS$5.21Centurium’sunrealizedprofitwasUS$777mattheclosingpriceofUS$14.52/ADSonAug12,2022.IfapplyingourtargetpriceofUS$46.25withatargetmarketcapofUS$14.7bn,CenturiumwouldhaveanunrealizedprofitofUS$3.4bn,agenerouspayofftothegreateffortaswellastherisktakenbythefundanditssupportiveLPs.PricePriceAmountAccumulated(investment)profitAccumulatedAvg.costUSD/ADSUS$mUS$mUSD/ADSBuyBuySellBuyBuyJun-2018Nov-2018Jan-2020Dec-2021Jan-2022SeriesASeriesBSellsecondaryPreferredseniorsharesBuysecondaryBalanceSource:Filings36.9228.565.417.06.618.117.06.636.928.583.517.023.618.155.083.55.8711.7542.006.508.76(100)(78)232(240)(250)(436)(100)(178)54(186)(436)5.877.52.00)3.385.215.214Corethesiscomparisonwith2020shortreport2020ShortReport2022FullInvestmentMemo(FIM)TAMofcoffeeindustryBusinessModelFlaw#1:Luckin’spropositiontotargetcorefunctionalcoffeedemandiswrong.ThemarketofcorefunctionalcoffeeproductinChinaissmallandmoderatelygrowing.Thesis#1:BeveragedcoffeeenlargedtheTAM(totaladdressablemarket)ofChinacoffeeindustrysignificantly.Luckin’scoffeebusinessmodelBusinessModelFlaw#2:Luckin’scustomersarehighlypricesensitiveandretentionisdrivenbygenerouspricepromotion;Luckin’sattempttodecreasediscountlevel(i.e.,raiseeffectiveprice)andincreasesamestoresalesatthesametimeismissionimpossible.BusinessModelFlaw#3:Flaweduniteconomicsthathasnochancetoseeprofit:Luckin’sbrokenbusinessmodelisboundtocollapse.Thesis#3:Evolutionofself-operatedstoreUEofraisingsalesvolumeandeffectivesellingpriceatthesametime,supportedbyattractivebeveragedcoffeeproductsratherthandiscount.Thesis#5:ThehighSame-storeSalesGrowth(SSSG)from2021to1H22isexpectedtobenormalizedinthefutureandwillbemainlydrivenbyincreaseinpurchasefrequencyinthemid-to-longterm.Thesis#6:Operatingleverageofheadquarter-levelexpenseswillleadtoconstantcompany-levelmarginimprovement.Luckin’snon-coffeebusinessBusinessModelFlaw#4:Luckin’sdream“tobepartofeveryone’severydaylife,startingwithcoffee”isunlikelytocometrue,asitlackscorecompetenceinnon-coffeeproductsaswell.Neutral#1:Non-corebusinessessuchasteadrinks,lightmealsandsnacksareunlikelytocontributesignificantrevenueorprofitintheneartermandarenotmanagement’scurrentfocus.Thesisandrisksuniqueinthisreport•Thesis#1:GrowthpotentialandprofitcontributionfromfranchisestoresinlowertiercitiesoTheintroductionofbeveragedcoffeecreatesgreatpotentialforLuckin’sstoreexpansioninlowertiercitiesoThefranchisemodeloffersadecentreturntobothfranchiseesandLuckinitselfinlowertiercities;Luckinhasthepotentialtofurtherincreaseitsprofit-sharingratiowithfranchiseesasthecurrentreturnprofileforfranchiseesisaboveindustry-average•Thesis#2:ThebeveragedcoffeecategoryhasmoresimilarattributestocoffeeandwesternQSR(QuickServiceRestaurant),whereleadingbrandstakeadvantageofstableandloyalcustomerbehaviorstobuildlong-termmoats,butitislesssimilartothefreshlymadeteadrinkcategory.Luckin’spotentialroutetosuccessinthiscategoryliesinattractingandretainingnewcustomersofbeveragedcoffeeusingitscompetitivestrengthsandconvertingthemintoloyalcoffeedrinkers•Thesis#7:Awell-balancedindustryleadersupportedbyeconomiesofscale,productR&Dcapability,brandpower,supplychain,digitalizationandoperatingefficiency,aswellasasignificantfirst-moveradvantageinlowertiercities•Risk#1:IntensifyingcompetitioninthesegmentofbeveragedcoffeeoAmongalltypesofcompetitors,werecognizetheindependentcoffeebrandslaunchedbyfranchiseteashopsasLuckin’smajorthreatinthenext3-5years,astheyalsoofferaffordablebeveragedcoffeeandwillcompetewithLuckindirectlyinlowertiercities.Theyhaveexperiencesfromandsynergieswithexistingteadrinkbusiness.Moreimportantly,theyareabletoscaleupquicklyinallcitytiersbyfranchisemodeloWedon’tseeothertypesofcoffeebrandshavethepotentialtochallengeLuckin’sleadingpositionintheshort-to-mediumterm.Theyeitherdon’trealizethetrendofbeveragedcoffeeorcannotbuildasizablestorenetworktochallengeLuckin’sleadingpositioninlowertiercities•Risk#2:NegativeimpactfromtheimpactofCovid-19Benchmarkoftransactingstockpricesinkeyevents•OfferingtoCenturiumCapitalandJoyCapitalin2021:PriceUS$6.50/ADS,CenturiumCapitalinvestedUS$240minthecompany(36.9mADS)andJoyCapitalinvestedUS$10m(1.5mADS).Theinvestment5agreementwassignedinApr2021,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.riceUS5BasedontheIRRcalculationandhighconvictionlevel,coupledwiththehighlikelihoodofup-listingtoUSmainboardin2H22or1H23,werecommendalongposition.Themaintechnicalrisksaretheuncertaintyintimingoftheup-listingandthegeneralADRdelistingrisk,aswellasthesellingpressurefromthecontrollingshareholder’s27.5%holding.6CaseStudy: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.talconsumptionofwhiskyinJapanHighballcontributedtotheoldenageofwhiskyesurgencedrivenbyhighballSource:NationalTaxAgencyofJapan7Section1:CompanyBackgroundCorporateHistorybeforetheSelf-ReportedFabricationofTransactionsLuckinCoffeewasfoundedbyLUZhengyaoandQIANZhiyain2017.LUZhengyaowasthefounderofCARInc(formerly699HK)andUCARInc(formerly838006CH),andQIANZhiyaworkedforhiminthosecompanies.LuckinCoffeeopeneditsfirsttrialstoreinBeijinginOct2017,andquicklyexpandedtoachainof2,073self-operatedstoresbytheendof2018afterseveralroundsofprivatefund-raising.20172018201920202021No.20172018201920202021TotalSelf-ownedchisedSource:Filings992,0732,0734,7894,5072824,8033,9298746,0244,397627InApr2019,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.8191Q192Q193Q194Qrmbm191Q192Q193Q194QrmbmFraudcase:22Q19-4Q19nue478903432,2204,666Y/Ygrowth643%541%377%464%Costsandexpenses30612,0862,8476,494Pre-taxprofit(loss)(552)(657)(543)(627)(1,827)Realcase(Companyrestated)nue478653843502,546Y/Ygrowth438%250%208%Costsandexpenses3011662,1775,154Pre-taxprofit(loss)(552)(757)(723)(1,127)(2,607)Overstated:nue250700702,120Costsandexpenses52067040Pre-taxprofit(loss)500780Overstatementas%ofrealcasenue38%83%111%83%Costsandexpenses33%31%26%axloss-13%-25%-44%-30%Source:FilingsThecompany’sIPOwasinMay2019,anditsfinancialresultsfrom2017to1Q19wereauditedbyE&YintheIPOprocess.TheinvestigationresultsshowedthatthecompanybeganitsfraudulentwrongdoingsrightbeforeIPOinApr2019.Thestockpricereactedpositivelytoits3Q19quarterlyresultsand4Q19guidance,inproportiontothescaleofitsfraud.Q resultsresultsWefurthercomparedtheimpliedoperatingmetricsandcertainexpenseitemsofcompanyfilingswiththerealcaseinthe2020shortreport.Therestatementsarefarbelowthefraudcase,butquiteclosetotherealcasein2020shortreport.Thus,wethinkthecompany’srestatementsoffinancialstrulyreflectedthecompany’shistoricalfinancialperformance.94Q19ComparisonFraudcaseRealcase(Companyrestated)MWreportrealcaseNo.ofitemsperstoreperdayActualpriceperitem(incl.freeitems,rmb)Otherproductsitemsas%oftotal49511.822%2659.810%26310.06%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.7fundingcompaniestransferredmoneytoLuckinandLuckinalteredbankstatementssothatthefundsappearedtooriginatefromtheFictitiousAgents•LuckinalsoinflateditscostsandexpensesbyRMB1.34bninparttomaskt