Luckin Coffee’s Growth Prospects Generate a Buzz Amongst Analysts

(Bloomberg) -- Luckin Coffee Inc., China’s second-biggest coffee chain, received two new bullish reviews from Keybanc and Needham, while Morgan Stanley added a note of caution.

Analysts who have weighed in so far like Luckin’s strategic store positioning, competitive coffee pricing compared to rival Starbucks Corp and expansion potential in the Chinese market. Morgan Stanley analyst Lillian Lou was more cautious, seeing limited gains in the near future on “relatively low earnings visibility,” and noting that valuation already “looks fair.”

Shares of the Xiamen, China-based Luckin rose 8.5% from the May 16 initial public offering through Monday close, after dipping below the $17 offering price last month.

Morgan Stanley, Lillian Lou

Luckin may multiply sales 30x over from 2018 to 2021 as the chain opens more stores and wins over new customers.

“Coffee is one of the least penetrated and fastest-growing markets in China,” Lou said. “Urbanization and the increasing adoption of coffee-drinking by younger generations will underpin this growth.”

“We expect Luckin’s implied market share to grow from 1% to 23% in 2018-21. However, whether this is achievable is highly dependent on management’s execution, and intensifying competition or changes in consumer tastes could also increase earnings volatility.”

Luckin rated equal-weight, 12-month price target $21.

KeyBanc, Eric Gonzalez

“Luckin Coffee’s rapid ascent toward becoming one of China’s largest consumer brands has attracted its fair share of skeptics. However, we believe the company has several strategic advantages that should support its transition into a profitable business.”

Keybanc is positive on Luckin’s presence in China, limited direct competition and low budget model.

Luckin rated overweight, price target $22.

Needham, Vincent Yu

“Luckin requires customers to order their food on its app, thus gaining user engagement data to better tailor marketing, product offerings, and store location selection. Its data driven demand ‘heat map’ leads to Luckin to open in-business lobby pickup stores providing maximum convenience to its customers.”

Needham expects Luckin profits to break-even in the third quarter, while it may take another year for the company to reach cash flow break-even.

Luckin rated buy, price target $27.

To contact the reporter on this story: Cristin Flanagan in New York at cflanagan1@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Morwenna Coniam

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