Discussions after the Luckin Fraud: Interview with Adam Li, Partner of Panda Capital [3/3]
Is there any leeway for Luckin? What are the potential impacts of the Luckin scandal on Chinese companies seeking finance in both the primary and secondary markets in the US?
The article is translated by EqualOcean from the Chinese version published on the official WeChat account of iyiou.com, our Chinese website.
This is Part 3/3 of the takeaways from the interview regarding Luckin’s scandal that EqualOcean had with Adam Li, Founding Partner of Panda Capital, diving into the issue from the perspective of an institutional investor.
In the previous articles, we looked into the problems of Luckin Coffee up to now (in Part 1/3), as well as the value of Luckin Coffee and the future of the industry landscape in China (in Part 2/3). This part will focus on the impact of the incident on the investment industry.
Q: Do you think there is leeway for Luckin Coffee?
Adam Li: We saw some initial ‘running consumption’ (something like a bank run) of Luckin after the company announced its financial fraud. However, from what we have seen in recent days, the operation of its stores is returning to normal and there has not been much impact at the product level.
Even in the worst case, the habits of customers will not change with the shutdown of a single company. As for whether the customers of Luckin will go for other brands, it is a matter of opinion; as for the market, no matter whether it is coffee or tea, the fundamentals will not change much.
In my opinion, Luckin has been accepted by the consumers as a coffee brand so far, and quite a few of them have formed habits on consuming Luckin’s coffee. So from the perspective of a consumer brand, Luckin has its own value.
The problem for Luckin is not a result of a brand or product counterfeiting, but rather a result of issues in management and strategies. There are possibilities in the future, such as a third party entering and dissecting its fundamental business with its current management team and making some replacement.
As for Luckin itself, perhaps the company will consider shutting down some of its underperforming stores, or bringing in franchisees as it did for Xiaolucha – its tea brand, while the company takes charge of operations management and shares the revenue with the franchisees. All of these are open to discussion.
Q: What will be the impact of Luckin’s scandal – as well as other self-disclosed financial frauds recently – on Chinese companies’ subsequent IPOs in the US?
Adam Li: These incidents can have a periodic impact on Chinese companies aiming to list in the US market, and the negative effect can take up to three to four years to diminish.
Capital funds and investors are typically those who desire globalization the most. However, the interests of these players – as represented by the Wall Street – have been hurt as a result of the incident, and this could have a further impact for both the Chinese market and the US market in their globalization process, and the Chinese market is going to suffer more. This is because there is resistance in the US market; it is likely that a large number of companies will again consider dismantling red-chip structures as they did in 2016, as the Star Market and ChiNext in the mainland, as well as the Hong Kong exchanges, are offering more exit opportunities.
I hope that the negative impact of the incidents on Chinese companies to list in the US will diminish more quickly than the previous wave.
Q: What will be the subsequent impact of Luckin’s scandal on the financing of startups?
Adam Li: In the long run, the Luckin incident will result in startups that lie in the consumer industry finding it harder to reach out to finance. In particular, those whose business mainly focuses on offline scenarios and for whom it is already not that easy to raise money – this, plus the impact of the incident, will create challenges for the business model of having high investments upfront and use the money raised to do chain expansions.
If a chain solely relies on equity financing in the primary market to grow, it will be very hard to examine whether its growth is indeed healthy. A final question remains: will it be possible for retail chains – in the future – to leverage financing methods other than equity, for example, debt financing and issuing ABS?