The author of the report claims to have documented 11,260 hours of store traffic surveillance video that suggests Luckin inflated its number of items sold per store per day by 69% in the third quarter of 2019 and 88% in the fourth quarter of 2019.
The author also alleges that Luckin inflated its net selling price per item by 12.3% based on cross-checks with 25,843 customer receipts.
In addition to the claims of fraud, the author said Luckin’s core business model in China is flawed. Chinese citizens already intake about 86 mg of caffeine per day, in-line with other Asian countries, the report claims. Roughly 95% of that intake comes from tea, making the coffee market “small and moderately growing in China.”
“Luckin knows exactly what investors are looking for, how to position itself as a growth stock with a fantastic story, and what key metrics to manipulate to maximize investor confidence,” the report reads.
On Twitter, Muddy Waters Research tweeted a link to the full report. “We view the work as credible,” the firm wrote.
Fellow short seller Citron Research disagrees with the thesis:
Citron long $LK. We also rec. this report but all data from Biz Con China and App download and calls with competitors confirm financials. $LK biz is on fire in China. Citron has respect for Muddy, but this anon. report will fall short on accuracy. Expect LK management response
— Citron Research (@CitronResearch) January 31, 2020
The market seems to be taking the allegations against Luckin seriously, but Muddy Waters has a mixed track record of success making similar claims against other Chinese companies. Since the firm compared TAL Education Group (ADR) (NYSE: TAL) to Enron back in June 2018, the stock is up 19.2% overall.
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