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Wen / Zhong Wei
Source: connect insight (ID: lxinsight)
Since the explosion of financial fraud, Ruixing was once thought to be unable to withdraw completely. There are two possible outcomes waiting for it: bankruptcy or acquisition. But for now, it may eventually survive.
Six days ago, Ruixing handed over the largest fine so far and settled with the US Securities and Futures Commission with sky high compensation, which is also believed to be conducive to its future investor litigation and possible judicial investigation.
In the storm, lucky has already finished a year’s journey to the U.S. stock market. The stock price is fixed at $1.38 per share, which is 90% lower than the issue price of $17 when it was listed.
However, after delisting, it re landed on the US OTC market, allowing investors with Ruixing shares and heavy losses to continue trading. After the announcement of the settlement, the shares of lucky rose more than 30% to $9.7 in the pink list market, which provides trading and circulating quotation services for stocks that are not listed on the American stock exchange or NASDAQ, or do not meet the listing conditions.
Tuyuan Ruixing official micro
On the other hand, Ruixing’s stores across the country have not stopped operation, products are also being updated, and users can still place orders online. Under subsidies and discounts, some consumers are still willing to pay for it.
However, one obvious change is that the subsidies and discounts of lucky drinks have decreased a lot. In order to ensure the profit margin, in addition to reducing marketing expenses, Ruixing is also shrinking new business such as unmanned coffee machine and Xiaolu tea, and has changed the way of store expansion, instead of investing a large amount of capital in large and well decorated stores.
Can Dongrui make efforts to save itself?
Behind the reconciliation: cooperate with the investigation and change the management
Lucky involved in 2.2 billion financial fraud, touched the bottom line of NASDAQ, but the final result was beyond people’s imagination. In a sense, lucky successfully passed a hurdle.
Previously, the US Securities and Exchange Commission (SEC) took Ruixing to court, and now the punishment is implemented.
On the evening of December 16, US Eastern time, the SEC issued a statement to reach a settlement with lucky coffee over the financial fraud incident. Lucky agreed to pay a fine of 180 million US dollars (about 1.175 billion yuan) to exempt it from financial fraud charges.
It is worth noting that Ruixing agreed to reach a settlement without admitting or denying the accusations, but the settlement plan still needs to be passed by law before it can take effect.
US $180 million is the biggest fine ever imposed on China capital.
However, for Ruixing, paying a sky high fine and reaching a settlement with the SEC can be regarded as a hurdle.
The settlement will bring many conveniences to lucky.
Without admitting the charges, the SEC was unable to draw a legal conclusion on the fraud of lucky securities and would probably avoid some penalties.
For example, the Sarbanes Oxley Act of the United States in 2002 stipulates that once false financial statements and deliberate securities fraud are found, the relevant executives will be sentenced to 10-25 years’ imprisonment and a maximum fine of $5 million. Then, without admitting the charges, the company’s executives will be immune from prosecution.
At the investor level, Hao Junbo, a lawyer, said in an interview with the media that such a result is conducive to Ruixing’s having more opportunities to defend against investors’ lawsuits and more possibilities such as easing mediation.
In order to reduce the impact of financial fraud, lucky cooperated with the SEC and other regulators.
Guo Jingyi, chairman and chief executive officer of lucky coffee, also attributed the smooth settlement to: “Lucky’s cooperation in its investigation and remedial work.”
SEC mentioned the process of discovering the financial fraud of Ruixing: after the financial fraud was found during the audit of the company’s annual report, Ruixing reported the matter to SEC, cooperated with the investigation, initiated internal investigation, dismissed some personnel involved, and increased internal accounting control.
Fortunately, it was considered by Rui to actively cooperate with the internal supervision after the incident. Similar views have been mentioned in the relevant documents of the Department of justice and the securities and Futures Commission of the United States that taking internal investigation can obtain more favorable results, but on the premise of obtaining trust from the US Securities Regulatory Commission and the court.
Ruixing once set up a special committee to conduct internal investigation on financial data in 2019. Since then, the special committee has published many investigation results pointing to fraud, which to some extent cooperates with the SEC’s investigation, but the SEC has not publicly questioned the investigation results.
After the internal investigation, lucky’s management has also made significant adjustments. Among them, Qian Zhiya and coo Liu Jian, former CEO of lucky coffee, were removed from their posts and resigned from the board of directors in May 2020. On July 5, at the special meeting of shareholders, Ruixing Chairman Lu Zhengyao, directors Li Hui, Liu Erhai and Shao Xiaoheng were removed. This means that the top management of Ruixing involved in the fraud has been basically out.
Tuyuan Ruixing coffee official website
In addition, in order to cooperate with the SEC investigation, China Securities Regulatory Commission and other relevant domestic regulatory authorities have entered Ruixing investigation. According to Caixin, the State Administration of international market supervision and the Ministry of finance have successively investigated Ruixing.
In addition to cooperating with the investigation, lucky also promised to establish a strong internal financial control system, emphasizing that the company’s board of directors and management will attach importance to “compliance and corporate governance”.
Through the settlement in exchange for sky high compensation, Ruixing has passed the key hurdle, but it does not represent the final victory.
Shrinking the front
Ruixing, who is good at rapid expansion and spending money crazily, is trying to find a down-to-earth, economical other self.
The first is to shrink the new business. The “Rui instant purchase” of the unmanned coffee machine and the “Rui cost-effective” unmanned vending machine were launched at the beginning of this year, but it has been exposed that the laying and operation have been suspended. In addition, there is not too much Xiaolu business. However, some media have revealed that this may be related to the personnel change of Ruixing, and it is not an active contraction.
Secondly, Ruixing’s store expansion strategy has changed. Although the expansion rate of its stores has not slowed down, according to its published data, it still opened more than 2000 new stores in 2020. But the expansion of stores is no longer more than 80 square meters, beautifully decorated luxury stores, mainly choose the express shop model.
Generally located in office buildings and other areas, the number of employees is small and the demand for takeout is large, which is conducive to Lucky’s cost control.
Ruixing coffee offline store
At the same time, Ruixing, which takes price as its advantage, is changing the intensity of subsidies.
At present, the prices of Ruixing’s products are increasing, with 1.80% off coupons, 2.80% off coupons and 3.80% off coupons have been extremely rare. Now, there are only full discount coupons and 4.80% discount coupons, and the subsidy intensity has decreased a lot. In addition, there are measures such as canceling the first free cup for new users and raising the threshold of delivery fee for takeaway.
Ruixing no longer adheres to the low-cost coffee route to strive for more revenue, but the problem is that without the attraction of low price and subsidies, Ruixing needs to find more ways to obtain customer flow and order volume.
While deeply involved in the counterfeiting incident, Ruixing did not stop launching new products. In April, it has launched the cherry blossom Series in spring and the family of material Duoduo. In September, it launched the thick milk series.
The speeding up of new products and the “out of the circle” of some new products help lucky maintain the passenger flow. However, the product innovation still needs to be improved. “Xiaolu liaoduoduo” is considered to imitate Coco’s “milk tea three brothers” as a fist product.
Since the second half of the year, lucky began to settle in the takeout platform. At the same time, the private traffic and community diversion that once became the outlet of offline stores are now being constructed and operated by lucky.
“The monthly consumption frequency has increased by 30%, the number of weekly repurchase has increased by 28%, and the Mau has increased by about 10%. More than 35000 cups per day were placed with coupons, and more than 100000 cups were ordered by the community. ” In August this year, lucky CMO Yang Fei revealed a set of data about its social marketing.
Lucky uses coupons to attract users into the group and pull the group around the LBS location of the store. After entering the group, the operators will push new products, “welfare” and coupons for different products at four different time periods every day.
Tuyuan Ruixing coffee official website
Lucky hopes to use community operation to change the situation, but its operation mode is controversial. Lucky’s community is more like an advertising group. Operators frequently publish information to remind them to promote orders, and the conversion rate is questionable.
Although Ruixing has attracted a number of users before, the discount and subsidy of Ruixing are not as strong as before, which may lead to the loss of users and slow promotion of new products.
Before the negative effects of the counterfeiting event have not completely dissipated, lucky can only face the uncertainty in the future by increasing revenue and reducing expenditure, changing the original store expansion, subsidy and other strategies. This is also the signal that lucky finally returns to reason.
Can lucky be reborn?
Lucky is still alive, but there are many challenges ahead.
The settlement between Ruixing and the CSRC does not mean that Ruixing has survived the crisis completely. Ruixing will face more judicial investigations and may continue to face punishment.
The impact of skyrocketing fines on lucky is also self-evident. As of June 30 this year, the company’s unaudited cash and cash equivalents (excluding restricted cash and illiquid short-term investments) amounted to about 5.5 billion yuan, according to Lucky’s announcement.
In addition to the 1.175 billion yuan fine for settling with the SEC, Ruixing received the first ticket from the State Administration of market supervision on September 22, which imposed a total of 61 million yuan on Ruixing coffee’s two domestic operating entities and 43 third-party companies.
After the two penalties, Ruixing, which lacks profitability, now lacks financing channels for US stocks. Cash flow is the biggest hidden danger.
At the same time, lucky also has to face huge claims from investors, which is one of the key factors to determine the future life and death of lucky.
According to tiger securities, 95 institutions held 3783 shares of lucky coffee, accounting for 15.74%. As of May 1, among institutional investors, capital research and management company held 10.0877 million shares, accounting for 3.98%; Bank of America held 4.9737 million shares, BlackRock held 4.8382 million shares, and New York Life held 3.577 million shares, accounting for 1.96%, 1.91% and 1.41% respectively. In addition, there are many other institutional investors.
Back in June 2020, after the news of lucky delisting was confirmed, the stock price went down sharply. Until the 29th, Ruixing stopped trading after the opening, and finally stayed at the closing price on the 26th, which was US $1.38, with a market value of US $347 million, equivalent to a fraction of the market value of 10 billion at its peak. The loss of investors is undoubtedly huge.
After that, the suspended Ruixing entered the pink list market in the OTC market (American OTC market includes Nasdaq, OTCBB and pink order market), and the code changed to lkncy. This has become the only good news for investors, because after entering the OTC market, investors holding the delisted Ruixing shares can still continue to trade.
However, companies trading in the pink market do not have to bear many requirements, which are considered “venture capital” and can not satisfy investors who have suffered heavy losses.
Some investors can apply for compensation to the administrative settlement fund management agency. According to the Sarbanes act, after the 180 million US dollars paid by lucky coffee is turned over to the administrative settlement management agency, which is responsible for compensating the injured investors.
But more investors may choose to pursue liability in class action.
At present, class action has been initiated by private law firms in the United States. On November 3, Federman & Sherwood, a law firm, issued an announcement calling on investors to initiate and join class action lawsuits.
The SEC has mentioned in its announcement that during the financial fraud period, lucky has accumulated more than $864 million in financing from securities and debt investors. The coming class action of a large number of investors will lay a bomb on lucky’s future.
If the potential cash flow risks caused by indemnity are ignored temporarily, does lucky have a bright future?
Ruixing’s coffee market is still a market with unlimited potential. According to the analysis report on market demand and investment planning of China’s coffee industry from 2020 to 2025 released by forward looking Industry Research Institute, the annual growth rate of coffee consumption in China will reach 15%, far higher than that of 2% in the world. It is estimated that the scale of China’s coffee market will reach 217.1 billion yuan in 2025.
But this market is already a red sea. From chain coffee shops to new tea brands, to retail enterprises, all kinds of players are competing for the coffee market, which means that lucky has more room for growth, but it will also face more fierce competition.
Ruixing quickly conquered the city and occupied the territory, and once squeezed out many competitors. Lian coffee was once exposed to the closing tide in 2019. It was considered that Ruixing’s admission put it under great pressure. In the crazy subsidy war, it once faced the crisis of breaking the capital chain.
Ruixing’s early crazy and crude expansion way, did grab market share, but also let its business model is in doubt.
“Lucky is not only financial fraud, but also business model fraud.” Li Zhaoyu, a partner at stone forest capital, an equity investment management company, said in an interview that his ideas also represent some doubts in the industry.
On August 8 this year, lucky once held a “mid year National Conference” to announce the business situation of lucky coffee in the first half of the year: the overall profit and loss balance has been achieved in July 2020. Despite the impact of the epidemic, lucky coffee only has more than 300 university stores not open to the public. According to the current operation progress, lucky coffee’s management is expected to achieve overall profitability in 2021.
Once again, Ruixing is eager to prove its profitability to people, but it is also questioned that the current stage is a brief “comeback”. The negative brand image, the shrinkage of stores, the disappearance of subsidies and the loss of users all cast a shadow on its future. With the “catastrophe” of collective litigation, can it survive in the end?
(the head picture of this article is from Ruixing coffee official website.)
(statement: This article only represents the author’s point of view, not Sina’s position.)