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Why Luckin Coffee Stock Just Dropped Another 16%

By Rich Smith – Jun 22, 2020 at 1:09PM

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Forced selling could damage this stock's price.

What happened

Shares of beleaguered Chinese coffeehouse chain Luckin Coffee (LKNC.Y -5.12%) had tumbled another 16.8% through 11:35 a.m. EDT on Monday.

Over the weekend, The Wall Street Journal reported that banks that had extended margin loans to Luckin chairman Charles Lu have sued and won the right to sell tens of millions of dollars worth of Luckin stock owned by the chairman to collect money he owes them.

Chinese flag superimposed on a stock market chart

Image source: Getty Images.

So what

In total, the Journal reports, Luckin's chairman owes $324 million to the banks, which became due when he defaulted on his margin loan. To collect part of the money owed, courts have ordered that 131.25 million Luckin shares in China, worth about $63 million, be transferred to accounting firm KPMG for liquidation. Another 196.88 million Chinese shares -- owned by the chairman's sister and worth about $126 million -- are also likely to be liquidated in repayment of a loan.  

Additionally, this morning it was reported that Luckin will hold a special meeting of shareholders on July 5, at which it is likely the chairman will be voted out of office, alongside at least three of the company's other directors. Presumably, once removed from the company, these directors will also see little sense in retaining any Luckin shares they own, adding to the selling pressure.

Now what

The sale of all these shares en masse to repay the banks' loans is likely to depress the value of the stock as a buyers' market forms for Luckin stock. Investors selling Luckin stock today are simply trying to beat the rush for the exits.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Luckin Coffee Inc. The Motley Fool has a disclosure policy.

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