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Home / Business / Wall Street sees great potential for growth for Luckin in the undeveloped Chinese coffee market

Wall Street sees great potential for growth for Luckin in the undeveloped Chinese coffee market



Image of a cup of coffee at a Luckin Coffee location.

Fred Dufour | AFP | Getty Images

Beijing-based coffee chain Luckin Coffee is attracting the attention of Wall Street analysts, who hope the technology-driven business model of the new company will fuel growth in a subdued coffee market in China.

This is Luckin China's second-largest coffee chain grew nearly 50% on the first trading day on the Nasdaq in May. Although the stock has declined slightly since then, it has received some positive reviews from Wall Street.

Since Luckin was founded less than two years ago, the company has sold more than 1

10 million cups of coffee, according to Keybanc Capital. Luckin has opened 2,370 stores in his life and plans to open 2,500 in 2019. More than 90% of its stores are smaller "pick-up" stores designed in close proximity to its customers.

Charles Zhengyao Lu, chairman and founder of Luckin Coffee Inc., center left, and Jenny Qian Zhiya, CEO of Luckin Coffee Inc., center right, respond when the shares were listed on the Nasdaq MarketSite in New York during the company's IPO York, United States, start trading Friday, May 17, 2019.

Victor J. Blue | Bloomberg | Getty Images

According to Luckin, technology is the core of his business. The company uses Big Data Analytics and AI to analyze its customers' behavior and transactional data.

According to Credit Suisse, Luckin's self-developed mobile apps have "delivered significant cost and customer retention benefits to boost mass-market coffee consumption in China," with an above-average valuation of the stock and a price target of $ 24. The stock ended the week just over $ 18.

Similar to other IPOs like Lyft, Uber and Beyond Meat, Luckin is not yet a profitable company. In 2018, the chain had net sales of $ 125.3 million and a net loss of $ 241.3 million. However, Needham expects the coffee chain's earnings to be balanced in the third quarter of 2019.

Vincent Yu from Needham has a buy rating for Luckin Coffee with a target price of $ 27.

China's Unused Coffee Market

Luckin's opportunity in China is "one of the largest retail growth opportunities," according to KeyBanc Capital Markets, which has an overweight in the stock and a target price of $ 22.

In a tea-driven culture, coffee is a "highly under-penetrated" "market in China," Credit Suisse said.

According to market analyst Frost & Sullivan, cited by many analysts for Luckin, coffee sales in China are expected to increase significantly over the next few years.

"We forecast an increase in per capita consumption of freshly brewed coffee from 1.6 cups per capita per year in 2018 to 5.5 cups per capita per year in 2023," said the research firm.

The market has grown from 15.6 to 15.6 in 2013 to 56.9 billion yuan in 2018 and is expected to reach 180.6 billion yuan in 2030. This growth represents an average annual growth rate of 25%, according to Frost & Sullivan from 2018 to 2023.

[19659002] "We believe that a faster pace of life, changing consumer habits (younger generation with Western lifestyles), and rising disposable income will further boost the coffee market in China," said Tony Wang from Credit Suisse in a client note. 19659002] Morgan Stanley, who describes Luckin's stock as "high-quality, affordable and cheap," expects Luckin to grow its revenue 30-fold between 2018 and 2021. Morgan Stanley rated Luckin Equally with a target price of $ 21.

Bernstein, who does not cover the stock, believes, however, that the Chinese coffee market may never reach the expected level.

The per capita rate is a fraction of Japan's, Sara Senatore of Bernstein said in a research report. "At a similar stage of market development, the Japanese per capita rate was already 10 times higher, suggesting that China will never reach the coffee consumption rates prevailing in today's Japan," Senatore said Beijing, China, on Tuesday, January 15 2019.

Gilles Sabrie / Bloomberg | Bloomberg | Getty Images

A threat to Starbucks

Luckin is trying to overtake Starbucks as the largest coffee chain in China. Starbucks, celebrating its 20th anniversary this year in China, has expanded its presence in the world's second largest economy in recent decades.

However, Luckin is expected to have more locations than Starbucks in China By the end of 2019, according to Stifel, Starbucks would have received a hold rating, citing Luckin's growth.

In China, Starbucks is the leader in terms of revenue drivers in the flavor and mobile apps categories. Starbucks' competitors, which include Luckin, are leaders in the service, convenience and price categories, according to a study by Citi Research.

Luckin's strong discount distinguishes the company from the world's largest coffee chain. According to KeyBanc Capital Markets, Luckin's prizes will receive a 50% discount on Starbucks.

According to Vincent Yu of Needham, the high prices of Starbucks "drive" customers in China.

Earlier this year, Starbucks boss Kevin Johnson said that this is the case. "unlikely that Luckin overtook Starbucks in late 2019.


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