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China's Luckin Coffee roasting a rich IPO

It plans to raise as much as US$590m as it races to overtake Starbucks

A Luckin Coffee outlet in Beijing. Founder Qian Zhiya is growing the chain ultra-fast, expanding from nine outlets in 2017 to more than 2,000 at the end of March.

Hong Kong

LUCKIN Coffee is serving up a rich brew. It said on Monday that it plans to raise as much as US$590 million in an initial public offering as it races to overtake Starbucks. Although their business models are different, on at least one comparative measure, the Chinese chain's implied US$4 billion valuation is high.

Founder Qian Zhiya is growing the chain ultra-fast, expanding from nine outlets in 2017 to more than 2,000 at the end of March. It has been attracting customers, and burning through cash, with deep discounts and celebrity marketing. As a result, the company logged a net loss of US$475 million attributable to shareholders at the end of last year.

Going public so fast is rare, too. Luckin wants capital to tap the vast country of nascent coffee drinkers looking for a decent cup of joe on the go. In addition to opening new locations, it means taking orders through an app to gather data and improve customer loyalty.

By the end of 2019, Ms Qian plans to have over 4,500 stores on the mainland, compared to about 3,600 for Starbucks, which is opening around 600 a year.

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Comparisons are imperfect. Starbucks is profitable, while Luckin is not. What's more, Luckin is built on delivery and takeaway, and thus smaller shops. While Starbucks wants a piece of that action, too, having enlisted Alibaba to help, it is more focused on providing comfortable spaces for customers to sip their lattes.

In one sense, Luckin may look cheap. At its US$90 billion market capitalisation, Starbucks is worth about US$3 million per shop. On that basis, Luckin's nearly 2,400 would be worth about US$7 billion, or 75 per cent more than is suggested by the top end of the IPO price range, US$17 per American depositary share.

At the same time, each Starbucks store generated on average about US$800,000 of revenue at the end of 2018, or more than 12 times as much as Luckin's.

Running a two-table operation may be operationally cheaper than a comfy cafe at a busy intersection. Even so, Luckin's subsidies and promotions will keep running high for a while. All told, this share sales looks over-caffeinated. REUTERS

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