The Potential Delisting Of Luckin Coffee And What This Means For International Companies
Image courtesy of asiatimes.com
Despite the unfortunate circumstances arising from COVID-19, resulting in many lockdowns around the world, stock markets seem to be currently not paying attention to the alternate consequences hindering economic activity. Although fuelled by thriving tech companies, the NASDAQ composite index recently reached all-time highs and hit a $10000 milestone, signifying a bullish trend in markets. Given the recent record levels of unemployment and the official status of being in a recession, at a glance, it may seem as though US markets are currently not representative of the underlying economy. This highlights the discrepancies between Wall Street and Main Street, and the confident projections of many investors.
This comes at an ironic time for Chinese public companies listed on the NASDAQ exchange. Founded in late 2017, Luckin Coffee is a Chinese coffee company consisting of 6,912 stores in China (as of May 12), being the main competitor to Starbucks in China. It was found to have overstated its 2019 sales by a staggering 2.2 billion yuan – approximately $310 million. Consequently, trading of company shares halted on April 7th, pending a further investigation from the board of directors and law office Kirkland & Ellis LLP into potential accounting fraud. This brought bad news for Chinese giants like Alibaba and Baidu, who’ve both raised enormous amounts of capital from US investors over the years. This scandal has helped catalyse the US Senate passing a bill, which prohibits the Securities and Exchange Commission from permitting the listing of international companies that are either heavily owned or controlled by a foreign government, or that do not consent to Public Company Accounting Oversight Board inspection once every three years. This legislation was an attempt to increase transparency and prevent the possibility of accounting fraud occurring again in the future, something which has cost US investors billions of dollars. Chinese authorities have often made it difficult for overseas regulators to regulate or investigate Chinese public companies, and hence actions are often limited towards international firms which operate with such dishonesty.
On May 15, NASDAQ gave a delisting notice to Luckin Coffee because of "public interest concerns" related to "fabricated" transactions enlisted in the company’s annual report. Public interest is inherently compromised from the lack of confidence that investors can have in companies which engage in such activities. This notice was based upon Luckin Coffee confirming on April 2 that its 2019 sales had been fabricated by its COO at the time; the COO and CEO have since been fired. The company has requested to appeal against this decision, but it seems investors are unsure of what the outcome will be. May 20 saw trading recommence for Luckin Coffee, ensuing an opening decline of 35% in its share price, as investors fled from the company’s shares amid fear of delisting. About 75% of the company’s total market value has been wiped out as a result and pending lawsuits from both US and China are incoming. The company has since apologised for its dishonest practices. Distrust from the US into Chinese companies was already a concern, and this instance has only made things worse. This scandal has resulted in stricter future guidelines, set out by the new legislation.
Consequently, if a foreign company does not comply with the new legislation, it will subsequently be removed from the NASDAQ exchange. This decision may not be favourable for certain companies such as Alibaba which have been helped by the Chinese government to grow in the early stages of development from using its services for transactions worth billions of dollars between government agencies, bolstering Alibaba’s revenue figures. These actions may be frowned upon with regards to the new legislation because of the government intervention that has existed, and hence the threat of a potential delisting is ever-looming.
With political and economic tensions between the US and China growing, the Luckin Coffee scandal has only added fuel to the fire. The Senate bill was passed unanimously, which is telling of the atmosphere in the US surrounding China’s behaviour. The appeal given by Luckin Coffee was expected to take 30 to 45 days, but with the current pandemic, it is unknown how long it will actually take to reach a conclusion.
By Josh Davies