SPY - Luckin Coffee: Q2 2023 New Store Opening Updates

2023-07-28 08:06:15 ET

Summary

• Luckin Coffee opened approximately 1,241 new stores in China during 2Q 2023 and 8 new stores in Singapore by the end of July 2023.
• As expected, the Company surpassed the 10,000th store milestone on June 5th, 2023 and reached a total store count of 10,592 by the end of 2Q 2023.
• Luckin Coffee opened on average 14 new stores per day during 2Q 2023, reaching another historical high.
• Our investment thesis remains unchanged that a relisting onto the main exchange is imminent and will eventually unlock a significant upside of the stock.

LKNCY Stock Up 14% YTD 2023

Despite the solid and improving fundamentals, Luckin Coffee Inc. ( LKNCY ) stock price was still unfairly punished year to date by the increasing market concerns of weaker than expected post-COVID recovery in China and lingering geopolitical tensions. As of July 27, 2023, LKNCY was up 14.23% during 2023, trailing S&P Index ( SPY ) by almost six percentage points but outperforming Yum China Holdings ( YUMC ), Starbucks Corp. ( SBUX ), and Global X MSCI China Consumer Discretionary ETF ( CHIQ ) (see chart below).

LKNCY vs SPY, CHIQ, SBUX, and YUMC

What the market had overlooked so far is that LKNCY actually is perfectly positioned to outperform in a weakening consumer environment in China given its value proposition (low pricing point for high quality), extensive store network (the largest in China), and mobile app-centric business model (earlier and better than competitors).

Our investment thesis remains unchanged that LKNCY stock price could have 3x to 5x upside from its level in April 2022 and an imminent relisting onto the main exchange will be the key catalyst to unlock the move. Additionally, with the ever-improving fundamentals as well as the accelerated pace of store openings in China and overseas, investors could continue to be surprised to the upside during 2023.

Total Store Count Surpassing 10,000 Milestone

Based on the weekly updates from its WeChat channel, LKNCY opened approximately 1,241 new stores in China during the second quarter of 2023 (see charts below), and more importantly, it also achieved a major milestone of unveiling its 10,000th store on June 5th, 2023. At this speed, LKNCY should be able to operate close to 13,000 stores by year-end 2023.

Luckin Coffee Quarterly New Store Openings

Luckin Coffee Quarter End Store Count

In its 1Q 2023 press release, LKNCY disclosed that the mix of the newly opened stores remained consistent with the level in 2022, i.e., the company's self-operated stores accounting for 67% while the partnership stores (i.e. franchised stores) 33%. Over the past three years, the share of the partnership stores had steadily increased from 10% in 1Q 2020 to over 33% in 1Q 2023 (see chart below). This trend should continue in the rest of 2023 as the company relaunched its recruitment of partnership stores to 80 cities in 15 provinces in China early this year.

Partnership Stores as % of Total Stores

In the same earnings presentation, the company provided for the first time additional details about the new store breakdown between self-operated and partnership ones (see charts below). Among the new stores opened during 1Q 2023, 58% were self-operated stores while 42% were partnership stores. Over the past five quarters, the share of the partnership stores experienced quite a roller coaster ride, with over 50% during the first half of 2022, but down significantly to 24% at the end of 2022. This volatility was primarily due to the COVID policies and increased lockdowns in China during the second half of 2022. Share of new partnership stores immediately bounced back during 1Q 2023 after the COVID restrictions were lifted at the year-end 2022. We won't be surprised if the partnership store openings account for more than 50% during 2Q 2023.

Self-Operated vs Partnership Stores: New Openings

Another interesting data point is the number of cities covered at the quarter end. Even though the partnership stores accounted for only one-third of the total store count, they covered significantly more cities (see chart below). At the end of 1Q 2023, the partnership stores were opened in 232 cities while the self-operated stores in 60 cities. This mix seemed to be fairly stable over the past five quarters. The reason that the self-operated stores have higher store count in much less serviced cities is the store density. The self-operated stores are mainly in first and second tier cities, averaging 105 stores per city while partnership stores are in lower-tiered cities with only 13 stores per city on average. However, it also means that there could be significant room for the partnership stores to grow.

Self-Operated vs Partnership Stores: Number of Cities Covered

P ace of New Store Openings at Historical High during 2Q 2023

The average new store openings per day is the key metric to measure LKNCY's pace of opening new stores. As illustrated in the chart below, the pace of new store opening during the second quarter 2023 reached a new historical high of 14 stores per day, up from 13 in 1Q 2023 and more than doubled the full year average of 6.4 per day in 2022.

Average New Store Openings per Day 2Q 2023

New Store Openings on the Map

LKNCY updated the store map in its 1Q 2023 earnings presentation, and we added an overlay of new store openings data for the first half 2023 (store count in each province highlighted in red).

Our observations are as follows:

1. During 1H 2023, LKNCY opened new stores across all its existing markets. The growth continued to be density focused, with high-density provinces getting more new stores;
2. Three provinces (Jiangsu, Zhejiang, and Guangdong) with more than 500 stores (dark blue) saw new stores opening at the pace of more than 1 store per day, with Guangdong the highest at almost 2 new stores per day;
3. In the nine provinces with 201 to 500 stores (sapphire), the pace of new store opening during the first half of 2023 was roughly half of that of those tier-one provinces; and
4. Though not reflected at the provincial level on the map, the company expanded into 29 new cities in China in 2Q 2023 alone, most likely via partnership stores in lower-tiered cities.

10 Stores in Singapore

After opening 2 stores during the first quarter 2023, LKNCY opened another 5 stores in Singapore during 2Q 2023 and 3 more in July per its social media postings. As of July 27, 2023, the company has a total of 10 stores in Singapore (see table below).

Luckin Coffee's Stores in Singapore as of July 27, 2023

The company disclosed little information about the operating statistics of its new stores in Singapore. One alternative indicator we could use to assess the performance of these stores is the number of downloads of Luckin Coffee's mobile apps (Singapore version).

Luckin Mobile Apps

LKNCY has a unique mobile app-centric business model in which the traditional offline cashier in a store is eliminated and all the clients are "forced" to place their orders 100% through the mobile apps. Most likely, LKNCY is implementing the exactly same strategy in Singapore, thus its apps download count could be used as a proxy for the size of its client base there. Apple Store does not disclose the app download count, but fortunately, Google Play does (see below).

LKNCY Android App Download Count

According to Google Play, LKNCY android app (Singapore version) was downloaded more than 50,000 times. We will have to make a reasonable assumption on LKNCY's iOS app download number so as to calculate the total number of mobile apps downloaded (both Android and iOS). Per its website, LKNCY currently has over 120 million registered App users, which includes both Apple and Android users (essentially all in China). Since Android store in China showed that the LKNCY Android app (Chinese version) was downloaded almost 88 million times, it is reasonable to assume that the remainder of 32 million app downloads were iOS users (120-88=32). In other words, the registered users of LKNCY mobile Apps in China are composed of approximately 73% Android and 27% iOS. If we apply this same breakdown to Singapore, the total downloads of LKNCY apps in Singapore would be around 68,000 (50K divided by 73%). According to another market data source "Statcounter", 71% of mobile phone users in Singapore used Android operating systems in 2023, so our 73% assumption is actually quite close to the market share reality.

In its earnings release, LKNCY typically calls its monthly active customers "average monthly transaction customers (AMTC)". If we assume that all of 68,000 users who have downloaded LKNCY mobile apps in Singapore are AMTC, we could make the following two observations about the market penetration rate and the store-level customer size:

1. LKNCY's current AMTC in Singapore is approximately 1.2% of the Singapore population (5.5 million). To put that in perspective, LKNCY had a total of 29.5 million AMTC in 1Q 2023 which was 2.1% of the Chinese population (1.4 billion);
2. On a per-store basis, LKNCY's AMTC per store in Singapore is 6,800 while its AMTC per store in China in 1Q 2023 was 3,153 (29.5 million divided by 9,351 stores in 1Q 2023). If we assume that only 50% of the 68,000 LKNCY app users in Singapore became active transacting customers, the AMTC per store would be dropped to 3,400.

Obviously, the exercise above has over-simplified the situation and should be only treated as a perspective but not an assessment or conclusion in any way. We would hope that LKNCY could provide more details about those Singapore stores in its 2Q 2023 earnings release , which is scheduled on August 1, 2023.

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