NEW YORK • Shares of Luckin Coffee dived as much as 81 per cent on Thursday after the Chinese coffee chain said an internal investigation had shown that its chief operating officer (COO) and other employees fabricated sales transactions.
The company suspended COO Jian Liu and employees reporting to him following initial recommendations from a special committee, which was appointed to investigate issues in its financial statements for the fiscal year ended last Dec 31.
Luckin said the investigation had found that fabricated sales from the second quarter of last year to the fourth were about 2.2 billion yuan (S$446 million). That equates to about 40 per cent of the annual sales projected by analysts, according to Refinitiv IBES data.
Mr Liu has been the COO of the company since May 2018. He could not be immediately reached for comment.
China's securities regulator said yesterday it strongly condemns financial misconduct by Luckin Coffee. The China Securities Regulatory Commission also said in a statement that it will investigate the issue according to the law and crack down resolutely on securities fraud activities.
Shares of the company were last down 76.3 per cent at US$6.20 on Thursday. They earlier hit a record low of US$4.90.
Luckin, which competes with Starbucks, had been one of China's few successful initial public offerings (IPO) last year. Its investors include asset management giant Blackrock, Singapore sovereign wealth fund GIC and China International Capital Corp.
The company raised US$778 million (S$1.1 billion) from a share sale and a convertible bond offering in early January, according to people with knowledge of the matter. The company also raised US$645 million in its US IPO.
However, there were rumblings that there was something amiss at the company and some investors received an anonymous report alleging that the company was fabricating some numbers.
Earlier this year, short-seller Muddy Waters Research shorted the stock, citing a report alleging that Luckin fabricated financial and operating numbers from the third quarter of last year.
At the time, Luckin called the report's methodology flawed, the evidence unsubstantiated and said that the allegations were "unsupported speculations and malicious interpretations of event".
Muddy Waters said in an e-mailed statement on Thursday: "We believed this report was credible when we read it, and that's why we took a position. This is again a wake-up call for US policymakers, regulators and investors about the extreme fraud risk China-based companies pose to our markets.
"Luckin shows exactly why we need short-sellers in the market."
The funds that invested in Luckin, including Point72 Asset Management, formerly known as SAC Capital Advisors, declined to comment.
The coffee chain, founded in 2017, operated about 4,500 stores in China by the end of last year.
REUTERS, BLOOMBERG
