After two rounds of financing, the valuation of Luckin Coffee is highly controversial. With the analysis of the current operation data of Luckin Coffee, EqualOcean estimates the operation situation of Luckin Coffee in the year of 2019, 2020 and 2021 to explain what’s the necessary conditions Lucian should meet in order to worth its valuation, USD 2.2 billion. Besides, EqualOcean also gives the possible valuation interval of Luckin in the future.
Before the forecast of Luckin’s revenue and profit, we should take some basic variables into consideration, including the number of stores, the coffee’s unit price, the coffee’s unit cost, and the sales volume of each store. Besides, we should also concern the adjustment of the production structure in the future, and whether these adjustments would affect the profiting ability.
While forecasting the operation revenue and valuation, Starbucks (China) has the greatest reference significance to Luckin Coffee. Starbucks entered China 20 years ago, its business model and operation data are relative mature and stable. On the other hand, Luckin is in a period of rapid growth. In this way, EqualOcean regards the data of Starbucks (China) as the reference coordinate system of the future development of Luckin, and thus forecasts Luckin’s sales volume of each store, revenue, valuation, potential and market share in the future.
What Data Could We Calculate with The Luckin’s Operation Data Known?
We have known the operation data of Luckin from Jan 2018 to Sep 2018, and Luckin’s number of stores and sales volume of coffee till the end of 2018. With these data we estimate that Luckin is at a loss. In the following calculation, in order to get the more realistic and more accurate single-store sales, EqualOcean introduces the meaning of “number of stores that operates effectively”, which means the number of stores that converted from actual revenue and profit, in stead of the number of stores in physical meaning.
Luckin Coffee is in a period of rapid expansion and opens 2,073 stores in one year. However, the unit sales volume of a store opens in 1st, Dec 2018 cannot compare with a store opens in Jan 2018 or May 2018. We cannot get an accurate number of a unit sales volume if we use the gross sales volume of coffee divided by the number of stores. The actual value must be higher than the data we get with the wrong method. Set the month as the smallest unit, it is assumed that the number of stores opens at a linear growth rate during the period between two adjacent time points.
On Jan 1st 2018, opens 2 stores for trail operation;
From Feb to Apr, the number of new stores per month: (500-20)/3=160;
From May to Sep, the number of new stores per month: (1300-500)/4=160;
From Oct to Dec, the number of new stores per month: (2073-1300)/3≈258.
In this way, we could conclude that the number of effective stores in Jan is 2,
the number of effective stores in Feb is 160*11/12≈147;
the number of effective stores in Mar is 160*10/12≈133.
And so on, we could reckon that the number of effectively operating stores of Luckin Coffee is 950 in the year 2018.
By calculating the number of effectively operating stores, the data that EqualOcean wants to restore most is the actual sales volume for a single store of Luckin Coffee—94 thousand cups per store in 2018.
Scenario Calculation of The Operation of Luckin Coffee in 2019
Number of stores: The official of Luckin announced that in 2019, the number of new stores is 2000 and by the end of 2019, Luckin Coffee would have 4,500 stores. We assume that Luckin could achieve its goal;
Annual sales volume for a single store: Set the 94 thousand annual sales volume for a single store as a medium selling situation in 2019, and juding from the real saling situation, we giver 3 hypothesis. We use the data we got from 2018, as the normal sales volume in 2019, and we set it is the medium selling situation. We set the high selling situation qual to 1.3 * the medium one, while the low one equal to 0.8 * medium one; set the probability of the appearance of a high selling situation for 30%, medium for 50% and low for 20%, that is, the weighted average=0.3*the number of stores under high selling situation+0.5*the number of stores under medium selling situation+0.2*the number of stores under low selling situation;
Unit price of coffee: After the subsidy in 2018, the unit price of coffee is CNY 10.2 (USD 1.53). The official of Luckin Coffee announces that the subsidy would continue in 2019. According to the actual unit price of coffee (more than USD 1.53), we found that Luckin is carrying out a stepped price increase. EqualOcean assumes the unit price of coffee is CNY 10.5 (USD 1.6), which is 30% of the average unit price of Starbucks’ coffee—CNY 35 (USD 5.2);
Production Structure: The income structure of Starbucks is 73% on-store drinks (mostly is fresh ground coffee), 27% other productions (ready-to-drink coffee, instant coffee, light food, cups, etc.). Luckin Coffee can hardly reach the same income structure as Starbucks in one year. However, through the current dynamics of the introduction of light foods and other productions by Luckin, we found that it has adjusted its production structure intentionally. EO Intelligence assumes that the revenue-contribution ratio of coffee/non-coffee would be 90%:10% in 2019;
Unit cost of coffee: After the sales increase, the cost can be diluted to CNY 17.6 (USD 2.6).
Under the above conditions, in the year 2019, Luckin Coffee would still lose money. However, if the annual sales volume of Luckin could reach 440 million cups, it could be the competitor of the annual sales volume of Starbucks (China)—which is around 400 million cups.
Scenario Calculation of The Operation of Luckin Coffee in 2020
Number of stores: We suppose that in 2020, there will be 1,000 new stores and by the end of 2020, there would be 5,500.
Annual sales volume for a single store:
High selling situation=1.3 * medium selling situation of 2020E
Medium selling situation=99 thousand cups, the weighted average of 2019E
Set the low selling situation=0.8 * medium selling situation of 2020E
Set the probability of the appearance of a high selling situation for 30%, medium for 50% and low for 20%, that is, the weighted average=0.3*the number of stores under high selling situation+0.5*the number of stores under medium selling situation+0.2*the number of stores under low selling situation;
Under these conditions, we could conclude that the annual sales volume for a single store in 2020 would be 104 thousand cups. Referring to the sales data of Starbucks (China), we believe that Luckin could achieve this volume;
Unit price of coffee: In 2019, we suppose the unit price of coffee is CNY 10.5 (USD 1.6); in 2020, if Luckin Coffee want to make revenue, it has to improve the unit price of coffee. We suppose the unit price of coffee in 2020 is CNY 17 (USD 2.5), which is about half of the average unit price of Starbucks—CNY 35 (USD 5.2).
Production Structure: Luckin Coffee would increase the variety and number of light foods and other productions. EqualOcean suppose that in 2020, the contribution ratio of coffee/non-coffee would be about 85%:15%;
Unit cost of coffee: We still setthe cost can be diluted to CNY 17.6(USD 2.6).
Under the above conditions, in the year 2020, Luckin Coffee would still lose money. However, if the annual sales volume of Luckin could reach 570 million cups, while the sales volume of a single store could reach 104 thousand cups, Luckin could be almost equal to the annual sales volume of Starbucks (China)—which is around 400 million cups, and the annual sales volume of a single store—which is 113 thousand cups.
Scenario Calculation of The Operation of Luckin Coffee in 2021
Number of stores: We suppose that in 2021, there will be 1,000 new stores and by the end of 2020, there would be 6,500. In this year, the total number of Luckin’s stores would exceed the Starbucks’ 6,000 stores plan which aims to be achieved by then end of Sep 2022. Judging from the expansion speed and operation ability, EqualOcean believes Luckin could have more stores than Starbucks in 2011;
Annual sales volume for a single store:
High selling situation=1.3 * medium selling situation of 2021E
Medium selling situation=99 thousand cups, the weighted average of 2020E
Set the low selling situation=0.8 * medium selling situation of 2021E
Set the probability of the appearance of a high selling situation for 30%, medium for 50% and low for 20%, that is, the weighted average=0.3*the number of stores under high selling situation+0.5*the number of stores under medium selling situation+0.2*the number of stores under low selling situation;
Under these conditions, we could conclude that the annual sales volume for a single store in 2020 would be 109 thousand cups. Referring to the sales data of Starbucks (China), we believe that Luckin could achieve this volume;
Unit price of coffee: In 2019, we suppose the unit price of coffee is CNY 10.5 (USD 1.6); in 2020, Luckin Coffee increases its price into CNY 17(USD .2.5). In 2021, we suppose that in order to improve the loss situation, Luckin would continue to improve its unit price step by step. EqualOcean assumes 4 unit-prices: CNY17.6(USD 2.6) which is the same with the cost, CNY 20 (USD 3.0), CNY 24 (USD 3.9), which is 70% of the unit price of a Starbucks coffee.
Production Structure: Luckin Coffee would keep increasing the variety and number of light foods and other productions. EqualOcean suppose that in 2021, the contribution ratio of coffee/non-coffee would be about 80%:20%;
Unit cost of coffee: We still setthe cost can be diluted to CNY 17.6(USD 2.6).
Under the above conditions, in the year 2021, Luckin Coffee would make money. With a positive net profit, we could use the PE value to give Luckin Coffee a valuation.
When the unit price of coffee is settled to USD 2.6, which is close to the cost of coffee:
We found that the net profit would be around USD 68.8 million.
When the unit price of coffee is settled to USD 3.0, the net profit would definitely increase:
In this case, the final net profit of Luckin Coffee would reach USD 270.4 million.
How to Determine The Reasonable PE Value of Luckin Coffee?
EqualOcean believes that the growth ability and liquidity of a firm are two significant factors to determine its PE value. The growth ability reflects the growth rate of a firm’s performance, development level, and the growth potential in the future; the liquidity reflects the operation efficiency to a large degree. We use the revenue growth rate and the net profit margin to measure these two abilities separately. We hope these two indicators could roughly frame the current location and business potential of listed companies in catering industry and use this as a reference coordinate system for the development of the PE value of Luckin Coffee.
In 2018, Luckin Coffee was in a stage of rapid expansion, and opens 2,073 stores in one year. In the store-opening period, the mainstream is to gain more user traffic with the subsidy and cultivate users’ consumption habit. The instant delivery and low-cost strategies account for a large portion of the cost, and the cost structure has not reached a reasonable state.
In 2019, it is estimated that the number of Luckin’s stores would be 4,500, exceeding that of Starbucks. In terms of revenue, stores opened in 2018 have consistently contributed incremental revenues. In addition, with the increase of market share, and the cultivation of consumption habit, we may consider optimizing the cost structure or adding other productions with high-margin (own-brand juice, light food, light meal, etc.), which is expected to better the financial situation.
Luckin Coffee is a growing enterprise, and it’s expected that Luckin’s performance grows rate would stay in a good situation. Besides, Luckin announces that it does not pursuit profitability at the current stage. Although the cost is very heavy, Luckin’s profit margin is increasing in the following 3 years. Under the expectation of increasing large potential for growth, the PE value of Luckin should be higher than that of Starbucks, 28. At the same time, referring to the companies that develop well in recent times, wing café (PE value is 62) and Haidilao (PE value is 71.6), EqualOcean limits the PE value of Luckin Coffee to 30.
Taking the data we got from the table, and combine with the PE range we gave that from 28 to 30, we could get a valuation range of Luckin Coffee—from USD 1.9 billion to 8.1 billion. Taking the current valuation of Luckin, which is USD 2.2 billion, we believe that the reasonable valuation of Luckin Coffee would be USD 3 billion to USD 8.1 billion by 2021.
On Feb 28, 2018, according to Reuters, Luckin Coffee is meeting with investment banks such as Credit Suisse, Goldman Sachs, and Morgan Stanley, and plans to IPO in the U.S. with a valuation about USD 3 billion. However, the PR director of Luckin Coffee, ZHAO Yanyan(赵艳艳) states that Luckin has no idea about this information. EqualOcean believes if Luckin Coffee is listed, the reasonable prediction range of its PE value would between 28 and 30. According to the calculation logic of EqualOcean, under the condition that all the conditions mentioned above are met, the PE valuation method is adopted. In 2021, Luckin Coffee has a relatively complete and feasible valuation variable range of CNY20.1 billion - CNY 54.2 billion (USD3 billion – USD8.1 billion).