Shares in Luckin Coffee plummeted by 11% on Friday after Muddy Waters Research, a China-focused short-seller research and investment firm, tweeted that it had placed a large short bet on Luckin’s Nasdaq-listed stock after receiving an 89-page report sent anonymously (and attached to the tweet).
MW is short $LK. We received unattributed 89-page report alleging $LK is a fraud: "number of items per store per day was inflated by at least 69% in 2019 3Q and 88% in 2019 4Q, supported by 11,260 hours of store traffic video" We view the work as credible. https://t.co/N3rXlrvfcZ
— MuddyWatersResearch (@muddywatersre) January 31, 2020
Muddy Waters claims that Luckin has fabricated some financial and operational figures (paywall). After deeming the report authentic, Muddy Waters decided to short Luckin’s stock and publish the report on Twitter. The allegations include that Luckin’s business model is fundamentally broken and it faces major accounting issues. According to the report, the “number of items [sold] per store per day was inflated by at least 69% in 2019 3Q and 88% in 2019 4Q, supported by 11,260 hours of store traffic video.” The videos were apparently recorded by the authors of the report.
Luckin responded to the report by stating, “The Report alleged the number of items per store per day was inflated in 2019 Q3 and Q4. There are material inconsistencies between the unsubstantiated data presented in the Report and the actual data from the Company’s own system.” Luckin shares were down as much as 27% on Friday until Citron research, a rival short-selling firm rival, defended Luckin and said the firm holds a long position. Before the allegations, Luckin was already struggling against coronavirus challenges that forced manufacturers to freeze output and Luckin to close 200 stores in Wuhan.
Many critics pointed out that both firms have a significant financial motivation for publicizing their views on Luckin, and the report’s authenticity remains under question. Meanwhile, the company’s stock price has largely recovered.