KeyBanc Takes Bullish Stance On China's Luckin Coffee, Sees Profitability On Horizon

Luckin Coffee Inc – ADR LK has a number of strategic advantages, including exposure to China’s rapidly evolving coffee culture, limited competition, low costs and better analytics than peers, according to KeyBanc Capital Markets.

The Analyst

Eric Gonzalez initiated coverage of Luckin Coffee with an Overweight rating and $22 price target. 

The Thesis

Luckin Coffee’s unique position in China’s hypergrowth market — where it has limited direct competition — and its ability to provide quality and convenience at a low per-unit price should allow the company to grow revenue from an estimated 5 billion yen in 2019 to 15 billion yen in 2020 and 25 billion in 2021, Gonzalez said in the Tuesday initiation note. (See his track record here.) 

The analyst said he expects Luckin Coffee to become profitable soon, with a near-flat restaurant margin in the third quarter of 2019 and positive operating profit in early 2021.

In China, coffee is an “expensive indulgence,” and Luckin Coffee provides quality coffee at almost half the prices seen on the menus of Starbucks Corporation SBUX and the British brand Costa Coffee, Gonzalez said. 

Luckin Coffee strategically selected the country’s most densely populated cities for its store openings and has a technology-driven business model, where ordering and payments at the store take place online via the company’s mobile app.

This eliminates the need for a cashier and significantly reduces wait times and friction at the restaurants, the analyst said. 

Price Action

Luckin Coffee shares were falling by more than 4 percent to $17.70 at the time of publication Tuesday. 

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