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How a short-seller’s warning helped take down Luckin Coffee

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In January, days after the shares of Luckin Coffee Inc. hit a record high on the Nasdaq Stock Market, giving the company a $12bn valuation, a cryptic email arrived in the inboxes of multiple short sellers.

“A new generation of Chinese Fraud 2.0 has emerged,” it said. “Companies that start off as fundamentally and structurally flawed business model [sic] that evolves into fraud.” The author offered to share customer receipts and videos from Luckin Coffee outlets, attached a long report about the company and said the short-sellers could publish and take credit for it.

Several American money managers reviewed the report, which accused Luckin of inflating its sales. Carson Block of Muddy Waters LLC published it, posting the 89-page report on Twitter on Jan. 31. Luckin’s auditor subsequently discovered that several employees had faked revenue and expenses and on April 2, the company disclosed that as much as $310m of its 2019 sales were fabricated. Its shares collapsed, less than 11 months after the company went public, and will soon be delisted.

The stunning fall of Luckin, an upstart rival to Starbucks in China that touted itself as the country’s largest coffee chain by stores, has sparked a lot of investor soul-searching. Should they have followed the recommendation of Block, who has bet against multiple listed Chinese companies? Should they have doubted the company when it refuted the allegations in the anonymous report? Could they have done more due diligence to determine whether Luckin’s reported growth was too good to be true?

Well-known investors who lost money when Luckin’s shares plunged include Stephen Mandel Jr.’s Lone Pine Capital and Steve Cohen’s Point72 Asset Management. Commodities-trading giant Louis Dreyfus—which entered into a coffee-roasting venture and juice business with Luckin—and two top Chinese private-equity firms also had sizable equity investments in the company.

Several money managers who earlier invested in Luckin said they had little reason to doubt the company because it also had the backing of other prominent investors like BlackRock Inc. and Singapore sovereign-wealth fund GIC Pte. Ltd.

Some American hedge funds, wary of getting burned after previous frauds involving listed Chinese companies like Sino-Forest Corp. that also inflated sales, said they subjected Luckin to extra scrutiny before deciding to invest.

One fund’s work included spot checks on individual stores, taking note of crowded ones and the ubiquity of Luckin’s blue-and-white coffee cups. Independent data they reviewed showed a growth in downloads of Luckin’s mobile app—used by customers to order products and make payments—that tracked the company’s reported growth in sales.

Some investors who visited Luckin stores in person had reservations about the company’s business and strategy.

Baillie Gifford & Co., a large UK money manager, sent an analyst to China last year to visit several companies including Luckin, according to an article on its website. The analyst, who speaks Mandarin, met with Luckin’s management, went to one of its shops in Shenzhen and spoke with customers. Baillie ultimately passed on making an investment.

BCC Global, a Shanghai-based due diligence and research firm, in September 2019 contacted some investment funds with an offer to monitor customer traffic and sales at a carefully selected sample of Luckin’s cafes. After receiving interest in its proposal and doing its research and analysis, BCC found discrepancies with Luckin’s reported figures, according to emails reviewed by the Journal and people familiar with the company.

When the anonymous report that Muddy Waters eventually tweeted made the rounds early this year, some short sellers were sceptical about claims that Luckin inflated its sales. Andrew Left, who runs Citron Research and back in 2015 drew attention to questionable sales practices at Valeant Pharmaceuticals International Inc., said he decided to buy Luckin shares after speaking to one of its top shareholders. The individual, whom Left didn’t identify, assured him that it had run channel checks and believed the company’s financial results were accurate.

Block of Muddy Waters said it was the first time he took a trading position based on someone else’s research while circulating it.

“It wasn’t anything glorious we did here. We just felt confident that the report was directionally correct, so we decided we’d be a good platform for it,” Block said in an interview. He declined to disclose the identity of the author, whom he said he has known for several years and believed is credible.

Recipients of the anonymous report got it from an email address containing the phrase “coffeeforclosers.” Its author signed off as “GLEN,” according to a copy of the email obtained by The Wall Street Journal.

They were apparent references to the line “coffee’s for closers” from the 1992 American film “Glengarry Glen Ross,” about four real-estate salesmen who use aggressive and high-pressure tactics to close deals.

The anonymous Luckin report was produced by Snow Lake Capital, a Chinese hedge fund with offices in Beijing and Hong Kong, according to people familiar with the matter. The firm was founded in 2009 by Sean Ma, its China-born and US-educated chief investment officer who previously worked at a hedge fund for Ziff Brothers Investments, a New York-headquartered family office.

A spokesman for Snow Lake declined to comment. The firm has about $2.5bn under management, according to its website. It made most of its money on Luckin in early April when the shares lost most of their value following the company’s disclosure of fabricated sales, according to a person familiar with Snow Lake’s returns. Its flagship China fund, however, was down 1.3% in the year through May, another person said.

It isn’t known why Ma and Snow Lake didn’t want to take credit for the Luckin research, though short sellers sometimes choose to hide their identities to maintain access to company executives and avoid regulatory scrutiny.

The Luckin report was the result of an elaborate undertaking during the fourth quarter of 2019 that involved more than 1,500 individuals, who fanned out to about 15% of Luckin’s more than 4,000 outlets across China, according to the report.

They counted customers in the stores, recorded more than 11,000 hours of videos and collected scores of customer receipts. After analyzing all the data, the report’s author concluded that Luckin had inflated its sales because the channel checks indicated that sales at its outlets were far lower than what the company had reported.

It didn’t have insights into what Luckin was actually doing behind the scenes to boost its reported sales.

Last month, The Wall Street Journal reported that a group of Luckin employees began engineering fake transactions ahead of the company’s May 2019 IPO. They first used individual accounts registered with cellphone numbers to buy vouchers that could be exchanged for cups of coffee, then used many little-known companies to make bulk purchases of vouchers, according to documents reviewed by the Journal and people familiar with the matter. Most Luckin employees were unaware of the scheme.

In some ways, Luckin was exceptional. Relatively few companies accused by short sellers of accounting chicanery ultimately disclose wrongdoing. In addition, shares of many companies accused by short sellers of accounting misdeeds have gained in value over time.

Between 2017 and 2019, short-sellers accused 32 US-listed companies of accounting misdeeds, according to Breakout Point, a data provider that analyses short-selling trends. In the six months following those allegations, 25 of the stocks gained and the rest declined.
Luckin’s shares fell in February after the anonymous report came out before rising again. Credit Suisse Group, the investment bank that led Luckin’s 2019 IPO and a follow-on sale of shares and convertible notes in January 2020, published a research report defending the company

“We found no hard evidence in the short-seller report to prove Luckin’s business as fraudulent, and some of the allegations are baseless or have major flaws, in our view,” a Credit Suisse report said on Feb. 4, maintaining an outperform rating on the stock. Morgan Stanley, which also underwrote Luckin’s share sales, didn’t address the allegations but kept the equivalent of a hold rating on Luckin in a report issued that month. After the company disclosed its accounting misdeeds, analysts at the two banks suspended coverage of the stock.

A Credit Suisse spokeswoman said the firm was one of five brokers with a buy or outperform rating on Luckin’s stock as of March 2020. Its research analysts based their views “on information prepared by management and financial data reviewed by the company’s auditors,” she added.

Accounting firm Ernst & Young Hua Ming LLP in April said it uncovered evidence that some Luckin employees had fabricated revenue and certain expenses. But just a few months earlier, the auditor reviewed the company’s interim financial statements that were included in a January 2020 prospectus for a share sale and issued a private “comfort letter” that indicated it didn’t have any issues with the numbers, according to a person familiar with the matter. A spokeswoman for EY declined to comment, citing client confidentiality.

“There’s very deep prejudice running through the industry that the big banks are the white shoes, well-pedigreed with good education, and the independent research firms are unwashed and not to be relied on,” said Anne Stevenson-Yang, co-founder of J Capital, a short seller that earlier this year also alleged that Luckin was inflating its sales.

Ultimately, it is difficult for even the most sophisticated investors to avoid falling prey to a publicly listed company that is determined to cheat, said JP Gan, a Chinese venture investor and founding partner of Shanghai-based INCE Capital.

“The basic principle of capital markets is trust. The default assumption is everyone is good because the bad apples have been screened out, or it won’t be listed,” he said.

Write to Jing Yang at Jing.Yang@wsj.com, Juliet Chung at juliet.chung@wsj.com and Julie Steinberg at julie.steinberg@wsj.com

This article was published by The Wall Street Journal.

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Source: CFL submits revised financial request to federal government

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TORONTO — The CFL sent federal Canadian Heritage Minister Steven Guilbeault a revised revised financial request Friday.

A league source said the league is seeking about $42.5 million in aid. In April, the CFL asked the federal government for up to $150 million in the event of a cancelled 2020 season due to the COVID-19 pandemic.

The source added the request is to over cover operating costs and player salaries for a shortened 2020 season and has involved input from the CFL Players’ Association.

The source spoke on the condition of anonymity because neither the government nor CFL have confirmed the request.

“We continue discussions with the federal government including discussions on our possible return to play,” the CFL said in a statement.

The CFL’s initial request of Ottawa consisted of three tiers: It called for $30 million immediately to manage the impact the outbreak has had on league business; additional assistance for an abbreviated regular season; and up to another $120 million in the event of a lost 2020 campaign.

When CFL commissioner Randy Ambrosie spoke to a federal standing committee on finance in May, he was roundly criticized for failing to stipulate where the funds would go and not involving the CFL Players’ Association in the process.

The earliest an abbreviated ’20 season will begin is September but Ambrosie has stated a cancelled campaign also remains possible.

Last month, the CFL and CFLPA began talks at amending the current collective bargaining agreement to allow for an abbreviated season. Prior to negotiations beginning, the league gave the union a memo outlining the conditions it wanted and a completion deadline of July 23.

This report by The Canadian Press was first published July 10, 2020.



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HIMSSCast: The ongoing financial toll of COVID-19 for health systems

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This isn’t a second wave. It’s a first wave that never really went away. That’s what experts are saying about the current COVID-19 resurgence. And just as the virus isn’t going anywhere soon, neither are the financial woes it’s creating for hospitals and health systems.

On this episode of HIMSSCast, host Jonah Comstock welcomes Healthcare Finance News Managing Editor Susan Morse and Associate Editor Jeff Lagasse to talk about the current state of affairs for hospitals.

 

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Telehealth claims increased significantly between April 2019 and 2020, report shows

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Nepal cable TV operators stop airing Indian news channels

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KATHMANDU, Nepal — Nepal’s cable and satellite television providers have stopped airing Indian news channels, with one operator saying Friday that the move was in response to public complaints over coverage of Nepal’s prime minister.

Sudeep Acharya, managing director of satellite television provider Dish Home, said they stopped airing the Indian news channels Thursday night after they were flooded with complaints about news reports about Prime Minister Khadga Prasad Oli.

Acharya said there was no government order to stop airing the channels, adding that the decision was made after discussions between cable and satellite television providers. It was not decided for how long they planned to stop airing the channels.

Some of the Indian media reports have suggested Oli is a puppet of the Chinese government. One recent report on Indian channel Zee news suggested Oli had close ties with the Chinese ambassador to Nepal, who has been meeting several leaders of Oli’s Nepal Communist Party.

Nepal’s government has condemned the reports.

“The government condemns any media content that assassinates the character of any person, spreads hatred and disregards the respect and honour of the individual concerned,” Nepal’s Information Minister Yuba Raj Khatiwad said Thursday.

Oli has been a target of both Indian leadership and media since his government brought out a new map of the country that includes territories claimed by both India and Nepal. The new map has strained relations between two South Asian nations with exchanges of strong statements.

Kathmandu’s relations with New Delhi worsened after Oli said last week in an internal party meeting that India was attempting to oust him from office with help from some of the members of his own party.

India had been a dominant force in Nepal until recently, when China’s involvement began to grow. Besides China’s investment in the building of airports, highways and hydro-power projects in Nepal, Chinese diplomats have worked to increase ties with Nepali political leaders.

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This story has been corrected to show that the government condemned content that assassinates the “character” of any person, not the “charter.”

The Associated Press

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