April 22, 2019 / 5:19 PM / a month ago

Starbucks' China challenger Luckin to raise up to $800 million in U.S. IPO: sources

HONG KONG/BEIJING (Reuters) - Luckin Coffee Inc, the Chinese challenger to Starbucks Corp, filed on Monday for a U.S. initial public offering (IPO) through which, sources said, it is looking to raise up to $800 million.

FILE PHOTO: The logo is seen next to a customer at a Luckin Coffee store in Beijing, China, February 28, 2019. REUTERS/Jason Lee

The Beijing-based coffee chain set a placeholder amount of $100 million to indicate the size of the IPO and did not disclose the number of shares it would offer, a filing bit.ly/2UtnC0g with the U.S. Securities and Exchange Commission showed.

Two people with direct knowledge of the matter told Reuters the startup is potentially looking to raise $500 million to $800 million from the listing which is scheduled to take place in May. An amount raised in that range would make Luckin the biggest U.S. IPO by a Chinese firm so far in 2019, according to Refinitiv data.

Another source said the loss-making company is aiming for a valuation of between $4 billion to $5 billion, a significant jump from $2.9 billion following its latest fundraising of $150 million that was announced last week.

Luckin Coffee, which has been expanding at breakneck speed, currently operates 2,370 stores in 28 Chinese cities and plans to open 2,500 new stores this year with the goal of displacing Starbucks as China’s largest coffee chain in the process.

The brand is banking on an increase in coffee consumption in China which, according to a report cited by Luckin in the prospectus, has almost doubled to 8.7 billion cups last year from 4.4 billion in 2013 and is expected to further rise to 15.5 billion cups by 2023.

However, the company is still loss making and has warned that it could continue to incur losses in the foreseeable future.

Since inception on June 16, 2017, the company has been in the red, with net loss to shareholders at $475.4 million last year, and total revenue of $125.27 million, according to the filing. For the first three months of this year, it posted a net loss of $85.3 million.

REWRITING RULES

Luckin has waged its cash-burning caffeine war with generous subsidies, speedy delivery and viral promotions on social media, which in turn has also pushed Starbucks to form a tie-up with local tech giant Alibaba to deliver coffee to customers.

According to the prospectus, its acquisition cost per new customer decreased to 16.9 yuan ($2.52) in the first quarter of 2019 from 103.5 yuan in the year-ago quarter, helped by the growth of its network and improved brand recognition.

It has also expanded outside coffee, allowing customers to purchase food and other beverages such as grapefruit cheese jasmine tea and Sichuan cold noodles with pulled chicken via its app.

“The big question for the brand long term is if, when it rolls back discounts, enough customers stick around,” said Ben Cavender, Shanghai-based principal at China Market Research Group.

“But the company has completely rewritten the rules for the coffee business in China and has impacted Starbucks as well as a host of smaller players.”

The coffee chain was co-founded by Chief Executive Qian Zhiya, the former chief operating officer of car rental firm Car Inc, and two other senior executives, and it is backed by Singapore’s sovereign wealth fund GIC Pte Ltd.

Other investors in the company include U.S. money manager BlackRock Inc, and Chinese investment firms Centurium Capital and Joy Capital.

The company, which intends to list under the symbol “LK” on Nasdaq, chose New York for the listing as Hong Kong generally requires IPO applicants to have a track record of three financial years, sources told Reuters earlier.

Another reason is that Luckin looks to benchmark itself against Seattle-based Starbucks in terms of valuation, sources have told Reuters.

The size of the IPO stated in preliminary filings is used to calculate registration fees. The final IPO size could be different.

CICC, Credit Suisse, Haitong International and Morgan Stanley are the underwriters to the IPO.

Reporting by Bharath Manjesh in Bengaluru, Julia Zhu in Hong Kong and and Pei Li in Beijing; Julia Fioretti in Hong Kong; Editing by Shinjini Ganguli, Cynthia Osterman and Muralikumar Anantharaman

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