KO - Luckin Coffee: Profitable Growth At A Discount

2024-06-11 17:43:54 ET

Summary

• China's coffee market is booming, and it is now likely the world's biggest.
• After doubling its store count in 2023, Luckin holds a market-leading position in China, with its nearest competitors, Starbucks and Cotti Coffee, struggling to catch up.
• Luckin's Gross Margin of 55% meant that despite the high SG&A costs associated with rapid expansion, it remained profitable.
• Luckin's shares look extremely inexpensive, even after factoring in a China discount.

China loves its coffee – who knew?

I recently spent some time in China, in the cities of Shanghai (population 26 million), Hangzhou (population 10 million), Suzhou (population 8 million) as well as several other smaller cities with populations of 1 to 3 million. To my surprise, there were coffee shops everywhere. These included a hole in the wall two - seat Manner coffee outlet, where delivery people on small electric scooters arrived every few minutes, micro roasteries with second hand furniture, jazz in the background, and cats wandering around, and finally, there were also higher end establishments like the Starbucks Roastery in Shanghai, where you can buy expensive brandy, whiskey, and cognac at 10:00 AM, to put in your coffee, or drink neat on the side....

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