The Financial Instruments Applied by Luckin Coffee
Besides fundraising, the chattel mortgage has the strategic transform from heavy-assets to light-assets operation. As the second largest shareholder of Starbucks, BlackRock's investment might not just be a portfolio optimization.
Luckin Coffee (瑞幸咖啡), a startup company who challenges Starbucks at the very beginning of its company foundation, has raised USD 150 million in its latest round of funding from investors including BlackRock Inc (the world’s famous investment management corporation, took the lead in this round with USD 125 million by its private equity fund), which values the company at USD 2.9 billion.
According to Reuters, people with direct knowledge of the matter said Luckin has tapped three banks including Credit Suisse to work on a U.S. IPO in 2019. Goldman Sachs and Morgan Stanley are also advising Luckin on preparatory work for the IPO. One of the people said the company is targeting a valuation of about USD 3 billion in the IPO. (see more on this topic)
Now with a valuation of USD 2.9 billion by BlackRock, Luckin is one step further to its “goal”.
Despite the IPO rumor, this article, on the other hand, will go through the financial related actions Luckin taking recently from public information.
First is the CNY 45 million chattel mortgage on the National Market Supervision Chattel Mortgage Registration System, the other is the equity interest pledge with Xizang Trust. Those two actions are both funding methods in China’s traditional financial market.
Besides fundraising, the chattel mortgage, in particular, has the strategic transform from heavy-assets to light-assets operation mode as well. When searches the social credit code of Luckin from the National Market Supervision Chattel Mortgage Registration System, we found one listing information of chattel mortgage with 1180 items in 1180 stores across the country as collaterals in 100 cities of Luckin franchise. The collaterals are coffee machines, refrigerators, and grinder, with a market price of around CNY 120,000, CNY 4500, and CNY 15,000 respectively. Therefore if we rounded up to CNY 140,000 worth of collateral per store, and multiplied by 1180 registered store, the total market value of the collaterals is around CNY 165 million. As we know that the mortgage contract is worth CNY 45 million, so the discount rate for the collaterals is 30% discount. As compared with traditional financial leasing market, the discount rate is 60% or 50% at least. Why Luckin applies a lower rate is mainly because coffee machines are also not common collaterals, considering the large machine in manufacturer's factories that worth for more than CNY 1 million, the coffee machine as collateral are not acceptable for most financial leasing companies. Therefore a discount rate of 30% may be reasonable.
According to Blackrock’s market investment outlook in 2019, they are very excited about companies in the emerging market with a clear balance sheet, sustainable growth, and good cash flows.
Luckin Coffee might not be the company that best suits all those standards that Blackrock mentioned, but as the biggest competitor for Starbucks right now. And Blackrock as the second largest shareholder of Starbucks, it would be a portfolio optimization to hedge some risk (do not put all your eggs in one basket) in China’s retail market.