Luckin Coffee chairman Charles Zhengyao Lu’s multi-billion dollar business empire is curdling like a week-old latte, as the founder of three listed companies is said to be in line for criminal charges over his role in a RMB 2.2 billion ($310 million) faked sales scam at the takeaway coffee company.
Following reports in Chinese local media last week that authorities have uncovered emails that show Lu’s hand in the fraud, Hong Kong-listed car rental firm CAR Inc – which Lu founded in 2007 and steered to a $400 million IPO in 2014 – said in a bourse filing yesterday that the Beijing-based entrepreneur had resigned as chairman.
Although CAR Inc did not link the departure to the Luckin Coffee scandal, market analysts have indicated that the move was designed to facilitate a bailout deal announced just ten days ago that will see state-owned BAIC Group buy a 21 percent stake in CAR Inc from Lu’s ride-hailing firm UCAR.
Shoring Up the Firewall
“Lu’s resignation signifies a move to cut CAR Inc’s business ties with the troubled Luckin, and also to help facilitate UCAR’s agreement with BAIC Group,” said Shen Meng, a director at boutique Beijing investment bank Chanson & Co. “The resignation doesn’t mean Lu gave up on CAR Inc – it is simply a move to prevent daily operations and negotiations of CAR Inc being negatively impacted by Lu himself and Luckin”.
In a separate disclosure yesterday, Lu’s ride-hailing firm UCAR Inc confirmed that all 270 million shares held by its founder, accounting for 10 percent of the company, had been frozen by order of the Beijing First Intermediate People’s Court until April 2023.
The further unravelling of the billionaire tycoon’s empire comes three weeks after the NASDAQ exchange slapped Luckin Coffee with a delisting notice, after the company admitted it had fabricated its 2019 sales.
Lenders Chase Luckin Following Delisting
“After delisting, Luckin will still exist as a company and as a legal entity, and will have to deal with collective lawsuits from its investors,” said Meng.
The Chanson & Co director went on to say that the legal and financial penalties of delisting could spell the end for Luckin, with stakes in the company held by Lu and other responsible shareholders potentially in line to be seized by creditors or regulatory authorities.
The coffee startup’s IPO raised $645 million in the second largest US float by a Chinese firm last year, with the company’s $3.5 billion valuation based on figures plumped up by fake receipts.
Differentiating itself from Starbucks by having 90 percent of its stores as pick-up only locations, Luckin has burned through cash from major backers including BlackRock and GIC in its effort to overtake the American chain as the biggest coffee chain in China.
With Luckin on the ropes, lenders including Credit Suisse, Goldman Sachs and Morgan Stanley started legal proceedings against Lu last month, after he defaulted on a $518 million margin loan backed against company shares.
The coffee chain’s stock value has tanked since the accounting fraud was exposed by short seller Muddy Waters Research five months ago, falling 92 percent from a high of $50.02 on 17 January.
CAR Inc has also taken a beating, with shares opening this morning on HK$2.25 – less than half of the HK$5.34 they were worth in January. UCAR, which is listed on mainland China’s NEEQ, opened this morning on RMB 2.54, down 82 percent from January.
Luckin Runs Out for CEO, COO
Lu’s resignation from CAR Inc comes just under a month after Luckin Coffee sacked its chief executive and chief operating officers following internal investigations confirming last year’s sham sales.
The company fired CEO Jenny Zhiya Qian, who co-founded the company with Lu in 2017, as well as COO Jian Liu, with the company saying at the time that it was “cooperating with and responding to inquiries from regulatory agencies in both the United States and China”.
Both Qian and Liu are long-standing lieutenants of the Luckin chairman, with an association going back ten years through their involvement with CAR Inc and UCAR in senior leadership roles.
Prior to her appointment as CEO of Luckin in November 2017, Qian had served as the chief operating officer at UCAR from 2016 to 2017 and the chief operating officer of CAR Inc from 2014 to 2016, according to Luckin’s IPO prospectus dated 22 April 2019. Liu, who was appointed as Luckin’s COO in May 2018, had served as the head of yield management for UCAR from 2015 to 2018, after joining the company in 2008.
Despite these overlaps between the companies, CAR Inc moved to reassure investors in April that it did not have any business dealings with Luckin Coffee.
The controversy has so far had no bearing on Lu’s status as chairman of the board of Luckin Coffee, a role he has held since June 2018. UCAR, which Lu also founded, has so far not made an announcement about his position as the company’s chairman.
Note: this story updates an earlier version which described Luckin’s fraud as totalling $2.2 billion. The correct amount is RMB 2.2 billion. Mingtiandi regrets the error.