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Starbucks China rival Luckin's rapid expansion powers upbeat forecast

(Reuters) - Starbucks China rival Luckin Coffee Inc forecast fourth-quarter revenue above estimates and posted a smaller-than-expected loss on Wednesday, as the company benefited from rapid store openings and lower expenses.

A logo is seen at a Luckin Coffee store in Beijing, China July 17, 2018. Picture taken July 17, 2018. REUTERS/Jason Lee/File Photo

The company’s shares, which have gained about 12% from the May initial public offering price, rose nearly 8% in premarket trading before paring some gains.

Since its launch in 2017, Luckin has not shied away from spending heavily to open stores as part of its stated goal of overtaking Starbucks Corp in China by the end of the year.

The company opened about 700 stores in the third quarter, taking its total in China to 3,680, while Seattle-based Starbucks took two decades to reach 4,125.

Starbucks is largely credited with making a nation of tea-lovers embrace coffee and Luckin is looking to ride on that through rapid expansion, heavy advertising and promotions.

Luckin’s results follow a strong show in China by Starbucks, helped by new stores, a beefed up loyalty program and an expanded delivery network through a partnership with Alibaba Group Holding Ltd. Luckin is now looking to markets beyond China and has set up joint ventures to expand into the Middle East and India.

The rapid expansion nearly tripled operating expenses to 2.13 billion yuan ($304.54 million) in the third quarter, but that decreased as a percentage of net revenues.

Luckin said a reduction in store pre-opening costs, rent payments and operating costs due to its app-focused business model helped cut its relative costs.

The company said it achieved a profit of 186.3 million yuan at a store level in the third quarter, compared with a loss of 126 million a year earlier and a loss of 55.8 million yuan in the second quarter.

“It is a good sign that expenses are falling. But the question will be how much farther they can push them down and if they can make individual stores more profitable,” said Ben Cavender, managing director at China Market Research Group in Shanghai.

“So far, attempts to sell food, for example, have not been overly successful.”

Net loss attributable to Luckin’s shareholders widened to 531.86 million yuan ($76.04 million) in the third quarter ended Sept. 30, from 484.93 million yuan a year earlier.

Excluding certain items, the company reported a loss of 32 cents per share, smaller than the 38 cents analysts had expected.

Total net revenue rose over six-fold to 1.54 billion yuan.

Luckin forecast fourth-quarter net revenue of 2.1 billion yuan ($300.25 million) to 2.2 billion yuan ($314.55 million), compared to analysts’ estimate of $289.08 million, according to three analysts polled by Refinitiv.

The company shares could come under pressure on Wednesday as early investors would be free to sell their shares following the expiry of a so-called IPO lockup period.

($1 = 6.9941 Chinese yuan renminbi)

Reporting by Uday Sampath in Bengaluru; Editing by Sriraj Kalluvila