Blue Lotus Research Institute

Andy Fu

China growth and global non-US Internet equities

Blue Lotus Research is a Hong Kong Type 4 Licensed investment advisory firm focusing on Chinese growth equities and global non-US Internet equities

Equity Bottom-Up

<ul>
<li>Luckin launched lemonade drinks with raging success of 5.08 mn cups sold for the first week, ~10% of store sales. Market cheered to send the stock higher;  </li>
<li>We view it with mixed feelings. While it is margin accretive and sales enhancing,  is not conducive to improving coffee penetration and cultivating consumers' habit for drinking coffee;</li>
<li>We see Luckin as increasingly one of, instead of the, street drink company, because lemonade is actually the top selling SKU of all milk tea vendors in China. </li>
</ul>


Luckin launched lemonade drinks with raging success of 5.08 mn cups sold for the first week, ~10% of store sales. Market cheered to send the stock higher;  
We view it with mixed feelings. While it is margin accretive and sales enhancing,  is not conducive to improving coffee penetration and cultivating consumers' habit for drinking coffee;
We see Luckin as increasingly one of, instead of the, street drink company, because lemonade is actually the top selling SKU of all milk tea vendors in China. 


Luckin's Small Step into Non-Coffee Drinks Is a Big Step of Its Future Directions

Blue Lotus China New Economy Research, Blue Lotus Research Institute

Eric Wen

Blue Lotus China New Economy Research

<ul>
<li>Despite Cotti’s difficulties, we are seeing intensified competition with well-funded competitors like Starbucks and KFC, joining the price war, which poses challenges to Luckin’s effort at raising prices.</li>
<li>We see Luckin at losing its coffee differentiation. We revised down average store sales growth to (5%)/(10%)YoY due to weak sales caused by the narrowing scope of the RMB9.9 promotion</li>
<li>We downgrade the stock rating from BUY to SELL and lower TP to US$17/ADS.</li>
</ul>


Despite Cotti’s difficulties, we are seeing intensified competition with well-funded competitors like Starbucks and KFC, joining the price war, which poses challenges to Luckin’s effort at raising prices.
We see Luckin at losing its coffee differentiation. We revised down average store sales growth to (5%)/(10%)YoY due to weak sales caused by the narrowing scope of the RMB9.9 promotion
We downgrade the stock rating from BUY to SELL and lower TP to US$17/ADS.


[Luckin (LKNCY US, SELL, TP US$17) Rating Change]: Old Tricks Might Have Run Out of Its Use

<ul>
<li>We cut Luckin Coffee’s 1Q24 revenue estimate by 3% to RMB7.9bn with 79% yoy and cut non-GAAP net income estimate by 42% to RMB318mn due to (1) weak sales；</li>
<li>We expect 2Q24 to be the turning point for earnings due to (1) sales improving with weather warm-up (2) ASP rebound from easing competition </li>
<li>We maintain the stock as BUY rating but lower TP by US$4 to US$37 to factor in the temporary near-term weak sale.</li>
</ul>


We cut Luckin Coffee’s 1Q24 revenue estimate by 3% to RMB7.9bn with 79% yoy and cut non-GAAP net income estimate by 42% to RMB318mn due to (1) weak sales；
We expect 2Q24 to be the turning point for earnings due to (1) sales improving with weather warm-up (2) ASP rebound from easing competition 
We maintain the stock as BUY rating but lower TP by US$4 to US$37 to factor in the temporary near-term weak sale.


[Luckin Coffee (LKNCY US, BUY, TP US$37) TP Change]:Weak Sales in 1Q24 but Likely to Improve in 2Q24

<ul>
<li>Luckin Coffee reported 4Q23 revenue/non-GAAP NI in-line/(39.8%) vs. our estimate due to (1) extra winter subsidies; (2) rental cost from new stores; (3) more operating expenditures.</li>
<li>We view the non-GAAP NPM decline to 5.1% in 4Q23 as temporary and outlook for sequential improvements in 1H24 from (1)ASP rebound from easing competition, (2)efficiency improvement in rental cost</li>
<li>We think Luckin’s profitability outlook is intact and maintain BUY rating, but lower TP by US$2 to US$41 to factor in the rising cost.</li>
</ul>


Luckin Coffee reported 4Q23 revenue/non-GAAP NI in-line/(39.8%) vs. our estimate due to (1) extra winter subsidies; (2) rental cost from new stores; (3) more operating expenditures.
We view the non-GAAP NPM decline to 5.1% in 4Q23 as temporary and outlook for sequential improvements in 1H24 from (1)ASP rebound from easing competition, (2)efficiency improvement in rental cost
We think Luckin’s profitability outlook is intact and maintain BUY rating, but lower TP by US$2 to US$41 to factor in the rising cost.


[Luckin Coffee (LKNCY US, BUY, TP US$41) TP Change]: Weak Earnings Could Be Temporary…Reiterate BUY

China/Asia TMT

Shawn Yang

Macroeconomics

<ul>
<li>We continue to chat with venture capitalists (VC’s) and hedge fund managers in our tour of China.</li>
<li>Our takeaway is that Chinese government intend to nurture local governments into VC’s to (partially) replace land finance as a pillar of fiscal revenue;</li>
<li>The resulted policy measures and shifts will benefit STAR SSE as a politically oriented destination and EV/renewable sectors as national championships, at the expense of the consumer sector.</li>
</ul>


We continue to chat with venture capitalists (VC’s) and hedge fund managers in our tour of China.
Our takeaway is that Chinese government intend to nurture local governments into VC’s to (partially) replace land finance as a pillar of fiscal revenue;
The resulted policy measures and shifts will benefit STAR SSE as a politically oriented destination and EV/renewable sectors as national championships, at the expense of the consumer sector.


Blue Lotus Macro: No Short-Term Investors in the Short Term, Summary of Our Tour of China.

China

Luckin Coffee Inc. provides non-alcoholic beverages. The Company offers various types of coffee. Luckin Coffee serves customers in China.

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Luckin Coffee (LKNCY US)

Luckin's Small Step into Non-Coffee Drinks Is a Big Step of Its Future Directions

Luckin's Lemonade drinks are a short-term profit boost, but may not sustain due to lower quality. Luckin's pursuit of me-too SKU is worrisome to us.

Blue Lotus Research Institute

[Luckin (LKNCY US, SELL, TP US$17) Rating Change]: Old Tricks Might Have Run Out of Its Use

To make things worse, we see Luckin at losing its coffee differentiation. We downgrade the stock rating from BUY to SELL and lower TP to US$17/ADS.

Blue Lotus Research Institute