Nasdaq readies to delist Luckin Coffee, China's answer to Starbucks, after fabricated transactions scandal

Logos are seen on the cups for sale at a Luckin Coffee store in Beijing, China July 17, 2018. Picture taken July 17, 2018.
PHOTO: Reuters

Luckin Coffee, touted as China’s answer to Starbucks, has been told to delist from the Nasdaq stock exchange because of fabricated transactions that have undermined trust in Chinese financial reporting.

According to a statement on Tuesday, the Xiamen-based start-up received a written notice from New York’s Nasdaq exchange on Friday, “indicating that the listing qualifications staff has determined to delist the company’s securities”.

The decision was based on “public interest concerns” over recently disclosed fabricated transactions by company staff, as well as Luckin Coffee’s past failure to publicly disclose information, it said.

Luckin Coffee – which was founded in 2017 and listed in 2019 – plans to request a hearing to appeal the decision and will remain listed on the Nasdaq bourse pending the outcome of that, it said. A hearing is usually scheduled within 45 days of the request.

Trading of the coffee chain’s shares has been halted on the Nasdaq since April 7. The stock’s price had plummeted by 83 per cent to US$4.39 (S$6.22) since April 2 when Luckin Coffee announced it had suspended COO Liu Jian for alleged misconduct.

Its turnover was inflated by about 2.2 billion yuan (S$438 million) between the second and fourth quarters of 2019, and certain costs and expenses were “substantially inflated” through fabricated transactions.

The delisting announcement comes after new rules were introduced by Nasdaq, which will make it more difficult for some Chinese firms to float on its stock exchange. They include tougher accounting rules and a requirement that an IPO raises at least US$25 million.

Though not directed specifically at Chinese companies, the curbs come as tensions escalate between the US and China over everything from trade to the spread of the coronavirus.

The Luckin Coffee scandal, meanwhile, has put a spotlight on how much investors should trust accounting by US-listed Chinese companies, and has exacerbated caution.

Last week Liu, and CEO Jenny Qian Zhiya, were fired and six other employees who were involved in or had knowledge of the alleged fraud were placed on suspension or leave, on the recommendation of a committee leading an internal investigation by the firm.

As of late 2019 Luckin Coffee was operating more than 3,500 outlets globally following a rapid two-year expansion.

This article was first published in South China Morning Post.