Luckin Coffee, China's answer to Starbucks, kicked off the new year announcing on Wednesday (Jan. 8) a share placement and a convertible bond worth a combined $821 million, just eight months after its US stock market debut.
Nasdaq-listed Luckin is selling 12 million American depository shares (ADSs) including 4.8 million secondary ones from Centurium Capital, its early backer. Centurium, a Chinese private equity firm, is selling about 20% of its holdings and will remain the largest institutional shareholder in the startup after the deal.
The main underwriters of the new shares include Morgan Stanley, Credit Suisse, China International Capital Corporation Hong Kong, and Haitong International.
The Chinese coffee chain is also raising another $400 million from a five-year convertible bond, carrying a coupon of between 0.5% and 1% with a conversion premium of between 27.5% and 32.5%.
Convertible bonds are bonds that are issued by corporations and that can be converted to shares of the issuing company's stock at the bondholder's discretion. Convertible bonds typically offer higher yields than common stock but lower yields than straight corporate bonds.
The three-year-old startup is expected to use the proceeds to fund general corporate purposes, which may include store network expansion, unmanned retail initiative, capital expenditure, research and development, sales and marketing, business development, international expansion, working capital, and other general and administrative matters.
Luckin, which served 40 million customers in 2019, also said it now has 4,507 stores
across more than 40 cities in China - achieving a goal it set one year ago and topping Starbucks which has 4,125 (as of Sept. 2019).
The Xiamen-based company is pushing forward with a capital-intensive strategy to grow its store network, this time with vending machines that sell freshly brewed hot beverages and snacks.
Jenny Zhiya Qian, Chief Executive Officer of Luckin Coffee, commented on the new retail strategy:
“Luckin Coffee’s unmanned retail network, store footprint and e-commerce channels, together form our proprietary omni-channel customer traffic network. With our value propositions of high quality, high affordability and high convenience, Luckin is rapidly becoming a well recognised, on-trend, and mass market fast-moving consumer goods (FMCG) brand. Luckin Coffee is dedicated to building a closed-loop smart retail platform with our own customer traffic and our own products. We will continue to grow both own traffic and products, improve brand value, expand the scale of our platform, and create more value for our customers. Luckin Coffee is on track to realize our mission of being part of everyone’s life, starting with coffee.”
China’s home-brewed coffee champion, which is also backed by Singapore sovereign wealth fund GIC, in November posted narrowed losses for the third quarter, showing an improved cost strategy.
Sales jumped 542% to $215.7 million, well ahead of analyst estimates at $205.8 million.
Its stock finished November up 54%, according to data from S&P Global Intelligence. Although investors have been jittery about Chinese stocks over the past two years amid the US-China trade tensions, Luckin's stock shot up by 68% in the period following the release of its Q3 results and until the end of 2019. Could Luckin's strong growth be a bullish sign for the Chinese economy?