Wall Street sees significant growth potential for Luckin in the untapped Chinese coffee market

The Beijing-based coffee chain, Luckin Coffee, draws the attention of Wall Street analysts who are hoping that the technology-driven business model of the new state-owned company will fuel the growth of the under-penetrated coffee market in China.

Luckin, China's second-largest coffee chain, climbed nearly 50 percent on its first Nasdaq trading day in May. Although the stock has declined slightly since then, he has collected several favorable ratings from Wall Street.

Since its founding less than two years ago, Luckin has sold more than 110 million cups of coffee, according to Keybanc Capital Markets. Luckin opened 2,370 stores during its lifetime and plans to add 2,500 stores in 2019. More than 90% of its stores are smaller "pick-up" stores designed close to its customers.

Luckin says technology is at the heart of his business. The company uses Big Data Analytics and AI to analyze the behavior of its customers and transaction data.

Its self-developed mobile apps have given Luckin "significant cost and customer engagement advantages to boost high-volume coffee consumption in China," according to Credit Suisse, which shows an outperformance of the stock and a price target of $ 24. The action ended the week just above $ 18.

Similar to other fresh IPOs like Lyft, Uber and Beyond Meat, Luckin is not yet profitable. In 2018, the chain reported net sales of $ 125.3 million and a net loss of $ 241.3 million. Needham, however, expects the profits of the coffee chain to reach equilibrium in the third quarter of 2019.

Needham Vincent Yu has a purchase rating on Luckin Coffee and a $ 27 target price.

Luckin's opportunity in China is "one of the world's largest retail growth opportunities," according to KeyBanc Capital Markets, which has an overweight position and a $ 22 price target. .

In a coffee-dominated culture, coffee is a "very under-penetrated" market in China, Credit Suisse said.

Coffee sales in China are expected to increase significantly in the coming years, according to market research firm Frost & Sullivan, quoted by many Luckin analysts.

"We expect per capita consumption of freshly brewed coffee to rise from 1.6 cups per year per capita in 2018 to 5.5 cups per capita per year by 2023," the research firm said.

The market grew from 15.6 billion yuan in 2013 to 56.9 billion yuan in 2018 and is expected to reach 180.6 billion yuan in 2030. This growth represents a compound annual growth rate of 25% from 2018 to 2023 , according to Frost & Sullivan.

"We believe that a faster pace of life, changing consumer habits (the younger generation adopting a Western lifestyle) and increasing disposable income will continue to drive the growth of the coffee market in China," he said. Tony Wang, Credit Suisse, in a note addressed to his clients.

Morgan Stanley, which qualifies Luckin's stock as "high quality, affordable and convenient," expects Luckin to multiply by 30 its sales between 2018 and 2021, "driven by the expansion of the stores, the strong customer growth "and" increased frequency of purchases ". Morgan Stanley has an equal weight rating on Luckin and a $ 21 price goal.

However, Bernstein, who does not cover the stock, suggests that the Chinese coffee market may never reach the expected levels.

The current rate of cup per capita in China is only a fraction of the Japanese rate, said Sara Senatore of Bernstein in a research note. "But at a similar stage of market development, Japan's per capita rate was already 10 times higher, suggesting that China will never reach the coffee consumption rates that exist in present-day Japan," he said. said Senatore.

Luckin is trying to overtake Starbucks as the largest coffee chain in China. Starbucks, celebrating its 20th anniversary in China this year, is strengthening its presence in the world's second-largest economy for two decades.

However, Luckin is expected to have more sites than Starbucks in China by the end of 2019, according to Stifel, which has awarded a Starbucks rating, citing Luckin's growth.

In China, Starbucks ranks highest in taste and mobile app categories in terms of sales factors; However, according to a Citi Research study, Starbucks' competitors, including Luckin, are leading in the service, convenience and price categories.

Luckin's big discount sets it apart from the world's largest coffee chain. KeyBanc Capital Markets suggests that Luckin's prices offer a 50% discount to Starbucks.

Needham, Vincent Yu, said the high prices of Starbucks "chase customers" in China.

Earlier this year, Kevin Johnson, head of Starbucks, said it was "unlikely" that Luckin outperforms Starbucks by the end of 2019.