China Starbucks rival Luckin jumps after US$561m IPO

[NEW YORK] Luckin Coffee, a challenger to Starbucks in the race to dominate China's growing coffee culture, climbed in its trading debut after raising USUS$561 million in an expanded US initial public offering (IPO).

The Xiamen-based company, which opened at US$25, climbed as much as 53 per cent in New York trading on Friday.

Luckin sold 33 million American depositary shares on Thursday for US$17 each, after marketing 30 million shares for US$15 to US$17. The shares closed up 20 per cent at US$20.38, valuing the company at US$4.8 billion.

The IPO topped earlier expectations of a share sale that people familiar with the plans said in February could raise about US$300 million.

Concurrent with the IPO, the company raised an additional US$50 million through a private placement with Louis Dreyfus, according to its filings.

Luckin is spending millions of dollars a year opening outlets to unseat Starbucks as China's top coffee company. Since its inception in June 2017, Luckin has quickly expanded into 2,370 stores in 28 cities, with backing from investors including Singapore sovereign wealth fund GIC and China International Capital.

By the end of this year, Luckin aims to become the largest coffee network in China in terms of number of stores.

It faces an uphill battle against Starbucks, which entered China 20 years ago and dominates with more than half of the market last year, according to Euromonitor. Luckin held only a 2.1 per cent share in 2018.

Starbucks has more than 3,700 outlets in the country and is also expanding at break-neck speed, opening a new store roughly every 15 hours. It's aiming to have 6,000 sites in China by 2023.

China may become an increasingly important market for coffee retailers due to the country's low per-capita consumption of the beverage and rising middle-class affluence, Bloomberg Intelligence analysts wrote in January. Coffee consumption is estimated to grow by about 3 per cent a year through 2023, according to Euromonitor.

Luckin, with a focus on convenience and affordability, is seeking to lure urban office workers who don't need the big plush spaces offered by Starbucks.

Many customers are initially attracted to the coffee chain by its free vouchers, and the company plans to keep investing heavily in discounts and deals.

Luckin's outlets are cashless and designed for fast pick-up as well as delivery, with an app that rushes out deliveries in about 18 minutes. The company has a partnership with internet giant Tencent Holdings.

Starbucks only launched delivery in August, under a partnership with Alibaba Group Holding.

Chasing the entrenched rival has been costly. Luckin said it's burning through US$130 million a year and may continue to see losses in the future.

The company reported a net loss of US$241 million for 2018, on total revenue of US$125 million. It lost US$82 million on revenue of US$71 million during the first quarter.

The offering was led by Credit Suisse Group, Morgan Stanley, CICC and Haitong International.

Luckin trades on the Nasdaq Global Select Market under the symbol LK.

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