Jian Liu, the chief operating officer of Luckin Coffee (OTC:LKNC.Y), inflated sales figures by fabricating transactions and expenses at least from April 1 through Sept. 30, according to a press release from the company on Thursday. This bombshell release also states that an internal investigation found fabricated transactions amounting to 2.2 billion renminbi, also known as yuan, which translates to more than $300 million by current exchange rates.
As of this writing, shares of Luckin Coffee are down around 80% as a result.
It was true after all
The inflated sales figures come from the second quarter of 2019 through the fourth quarter of 2019. Consider that Luckin Coffee reported net revenue of 2.4 billion renminbi during Q2 and Q3, and was guiding for between 2.1 billion renminbi and 2.2 billion renminbi in product revenue for the coming Q4, excluding any potential revenue from its new partnership model. In other words, a very major part of its business is in question. Therefore, its stock price plummet reflects the gravity of the situation.
When it comes to stocks of Chinese companies, investors are often fearful of fraudulent numbers. But this situation is made worse because Luckin Coffee was previously accused of inflating sales by a short seller called Muddy Waters Research, causing the stock to briefly sell off. On Feb. 3, Luckin's management had responded by saying these accusations were totally false. But now it's clear that it was true, and investors can't rely on reported results or future guidance numbers, at least for now.
If there's any silver lining to a report as terrible as this, it's that today's news is the result of an internal investigation. Luckin Coffee management has found the problem, suspended those involved, including Liu, and is having its findings independently verified. That said, it will take some time to definitively determine how bad this scandal is, and even longer to regain shattered investor confidence.