(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

HONG KONG - Not all spectacular frauds are created equal. Fifty weeks since Chinese coffee chain Luckin stunned investors with the news that a small group of staff faked 40% of its sales, sending its shares tumbling, its bondholders have agreed a deal that, if honoured, will virtually pay them out in full over five years. That suggests confidence that a real business is filtering through.

Luckin drew attention as much for its turbo-charged rise as for the admission of fraud. Surfing a cappuccino-sized wave of investing froth around China’s unicorns and boasting an app for ordering before rivals did, its breakneck store growth rate helped give it a $2 billion valuation within a year of its 2018 launch. At its January 2020 peak it was worth almost $13 billion. The bankrupt company, whose stock has traded over the counter since it was kicked off Nasdaq last July, is now back to a market capitalisation of $2 billion according to Refinitiv Eikon data.

That’s thanks to a 50% jump on Tuesday when Luckin announced its deal with a majority of holders of its $460 million in convertible bonds. They have agreed to take a mixture of cash, bonds yielding 9% and stock which, If all goes well, means they’ll eventually recoup between 91% and 97% of the securities’ original value.

There aren’t many current numbers available. But unaudited sales numbers cited by its Caymans liquidators in a December report suggest that in the three months to the end of September revenue grew 36% to 1.15 billion yuan ($176 million). At that pace, it would reach its faked September 2019 top line by September this year, Breakingviews calculates. Overall profitability is some way off, but it made money at an aggregate store level for the first time in August 2020, the liquidators said.

Big caveats remain. Luckin is still burning cash to grow fast. It is also the target of shareholder litigation in the U.S. courts while almost all its $743 million of cash sits in China with no guarantee offshore investors will get access. But it’s still able to brew a lot of cups of coffee.

 

CONTEXT NEWS

- China’s Luckin Coffee on March 16 announced a deal with the majority of holders of its $460 million in convertible bonds. The deal, in several parts, would allow them to recover up to 97% of their investment over the next five years through a combination of cash, shares and new bonds carrying a 9% coupon.

- Shares in the unprofitable but fast-growing coffee chain collapsed in April 2020 after the company said it had discovered sales faked by a small group of employees. The stock was delisted from Nasdaq in July and now trades over the counter.

- It was fined by both U.S. and Chinese regulators last year.

- A report by its liquidators in December, published on the company’s website, detailed progress in making its stores profitable.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(Editing by Antony Currie and Katrina Hamlin) ((jennifer.hughes@thomsonreuters.com; Reuters Messaging: jennifer.hughes.thomsonreuters.com@reuters.net))