Caixin
Jun 12, 2019 05:34 PM
BUSINESS & TECH

Luckin Coffee’s Growth Prospects Generate Analyst Buzz

A Luckin Coffee store in Wuhan, Central China's Hubei province, on May 25. Photo: VCG
A Luckin Coffee store in Wuhan, Central China's Hubei province, on May 25. Photo: VCG

(Bloomberg) — Luckin Coffee Inc., China’s second-biggest coffee chain, received two new bullish reviews from Keybanc and Needham, while Morgan Stanley added a note of caution.

Analysts who have weighed in so far like Luckin’s strategic store positioning and competitive coffee pricing compared with rival Starbucks Corp. and expansion potential in the Chinese market.

Shares of the Xiamen-based Luckin rose 8.5% from the May 16 initial public offering through Monday close, after dipping below the $17 offering price last month.

“Luckin Coffee’s rapid ascent toward becoming one of China’s largest consumer brands has attracted its fair share of skeptics. However, we believe the company has several strategic advantages that should support its transition into a profitable business,” said KeyBanc analyst Eric Gonzalez.

Keybanc is positive on Luckin’s presence in China, limited direct competition and low budget model. Keybanc rated Luckin overweight, with a price target of $22.

Needham expects Luckin profits to break-even in the third quarter, while it may take another year for the company to reach cash flow break-even.

“Luckin requires customers to order their food on its app, thus gaining user engagement data to better tailor marketing, product offerings, and store location selection. Its data driven demand ‘heat map’ leads to Luckin to open in-business lobby pickup stores providing maximum convenience to its customers,” said Needham analyst Vincent Yu.

Needham rated Luckin a buy, with a price target of $27.

Morgan Stanley analyst Lillian Lou was more cautious, seeing limited gains in the near future on “relatively low earnings visibility,” and noting that valuation already “looks fair.”

Luckin may multiply sales 30 times over from 2018 to 2021 as the chain opens more stores and wins over new customers, Lou said. “Coffee is one of the least penetrated and fastest-growing markets in China,” Lou said. “Urbanization and the increasing adoption of coffee-drinking by younger generations will underpin this growth.”

“We expect Luckin’s implied market share to grow from 1% to 23% in 2018-21. However, whether this is achievable is highly dependent on management’s execution, and intensifying competition or changes in consumer tastes could also increase earnings volatility.”

Morgan Stanley rated Luckin equal-weight, with a 12-month price target of $21.

Contact editor Yang Ge (geyang@caixin.com)


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