China probes alleged fraud at Luckin Coffee, banks review IPO work

By Julie Zhu and Zoey Zhang
FILE PHOTO: A cup of 'Luckin Coffee,' coffee is displayed during the company's IPO at the Nasdaq Market site in New York

By Julie Zhu and Zoey Zhang

HONG KONG/BEIJING (Reuters) - China's securities regulator said on Friday it would investigate claims of fraud at Luckin Coffee Inc <LK.O> and sources said some of the banks involved in the Chinese chain's successful U.S. IPO last year were reviewing their work in the listing.

Shares of Luckin, which competes in China with Starbucks Corp <SBUX.O>, sank as much as 81% on Thursday in New York after it announced an internal investigation had shown its chief operating officer and other employees fabricated sales deals.

The company said it had suspended COO Jian Liu and employees reporting to him following initial recommendations from a special committee that was appointed to investigate issues in its financial statements for the fiscal year ended Dec. 31, 2019.

The China Securities Regulatory Commission (CSRC) said on Friday it would investigate the case in line with any international investigation and strongly condemned any financial misconduct.

"Regardless of the listing location, listed companies should strictly abide by laws and regulations in relevant markets, and fulfil obligations to make truthful, accurate and complete disclosures," the regulator said.

Luckin did not respond to a request for comment on CSRC's observations.

At least two of the four banks which led Luckin's initial public offering (IPO) in May last year have begun reviewing their work for the float, according to four sources with knowledge of the scrutiny.

China International Capital Corp (CICC) and Morgan Stanley <MS.N> have begun informal investigations into the due diligence they did for the deal, according to the four sources.

The two, along with Credit Suisse <CSGN.S> and Haitong International Securities <0665.HK>, led Luckin's IPO, in which it raised $561 million at $17 per share, valuing the group at about $4.2 billion.

The four banks also worked on a follow-on share sale and a convertible bond worth a total of $980 million in January.

CICC, Morgan Stanley, Credit Suisse and Haitong declined to comment.

Luckin's shares tumbled to $6.4 by the end of Thursday trading from $26.2 at Wednesday's close, wiping out about $5 billion in market capitalisation.


CHINA CHILL

Bankers and investors warned on Friday that Luckin's issues were likely to weigh on other Chinese companies considering a U.S. IPO - a group already affected by the trade tensions of 2019.

"Sino-U.S. relations are bad already and Luckin has provided a perfect opportunity for China bashers in the U.S. who were already suspicious about Chinese companies," said one Hong Kong-based investor who focuses on American Depositary Receipts - a common form of shares for foreign companies listed in the U.S.

In September, sources told Reuters the U.S. government was considering delisting Chinese companies from U.S. stock exchanges, echoing efforts by lawmakers last June to force U.S.-listed Chinese companies to submit to greater regulatory oversight or face delisting.

“It will affect potential U.S. IPOs from China. China’s economy is not doing well already and with Luckin’s scandal these companies will face much tighter scrutiny for going public,” said a banker who specialises in tech firms' fundraisings, including IPOs.

Luckin said on Thursday that its investigation had found that fabricated sales from the second quarter of 2019 to the fourth were worth about 2.2 billion yuan ($310 million).

That equates to about 40% of the annual sales projected by analysts, according to Refinitiv IBES data.

Liu has been the COO of the company since May 2018. He could not be immediately reached for comment.

Founded in June 2017, Luckin had been one of China's few successful IPOs in New York last year, with a number of prominent U.S. investors, including hedge funds, investing in the company's shares.

Like others in the industry, the company has been hit hard by the coronavirus epidemic. In late January, it was forced to temporarily close an estimated 200 coffee shops in the central Chinese city of Wuhan, the original epicentre of the outbreak, as well as many in other cities.


(Reporting by Zoey Zhang and Sophie Yu in Beijing and Julie Zhu and Pei Li in Hong Kong; Additional reporting by Scott Murdoch and Kane Wu in Hong Kong, Samuel Shen in Shanghai and by Beijing Newsroom; Writing by Jennifer Hughes; Editing by Muralikumar Anantharaman and Nick Macfie)