Behind “gongdou drama” of lucky coffee: Lu Zhengyao still wants to be king

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Wen / Hou Minjing Dong
Source: new entropy (ID: Baoliao Hui)
“Gongdou drama” of lucky coffee has started again. This time, it is the drama of former and current directors.
On the evening of January 6, Ruixing was exposed that seven vice presidents, all branch managers and core business directors signed a joint letter to jointly report Guo Jinyi, the current chairman and CEO of Ruixing, for several “crimes” such as corruption, abusing power to eradicate dissidents, and reducing the Department’s staff establishment, demanding his removal from office.
In the eyes of the outside world, Guo Jinyi is Lu Zhengyao’s closest “own person”.
In 2016, Guo Jinyi joined suncar as assistant to Chairman Lu Zhengyao. Since its establishment, Ruixing has served as senior vice president of Ruixing, mainly responsible for products and supply chain. After the financial fraud in 2020, Chairman Lu Zhengyao was dismissed and Guo Jinyi served as chairman and CEO. However, in just eight months, Lu Zhengyao’s “confidant” became a “villain”.
According to an industry person close to lucky coffee, the key to this internal fight is that “Guo is not obedient, Lu is not happy, and he has to change people.” But at present, this statement has not been confirmed. Judging from Ruixing’s performance in the past six months, Guo Jinyi does not seem to have expanded the factional struggle in Ruixing’s previous management.
1. After Lucky’s delisting
In less than three years, lucky created two historical records of the fastest listing and delisting.
At the end of January 2020, Hunshui, a well-known short agency, released an 86 page anonymous investigation report, which broke the momentum of lucky coffee’s rapid development and pointed out its serious fraud, exaggerated commodity trading revenue and other problems.
On April 2, Ruixing reported that the sales volume of forged transactions from the second quarter to the fourth quarter of 2019 was about 2.2 billion yuan. On June 29, lucky stopped trading and entered the delisting process. Its stock price was fixed at US $1.38 per share, down 90% from US $17 when it was listed. Its market value was US $347 million, a fraction of the 10 billion market value at its peak.
Then, before the punishment boots fell to the ground, a series of personnel unrest occurred in the high-level. In May, Ruixing announced the adjustment of the board of directors and senior management. Qian Zhiya and Liu Jian, the former CEOs of Lu Zhengyao, were suspended. Guo Jinyi was the acting CEO, and six employees were suspended or resigned. In addition, the board of directors also suggested that Lu Zhengyao resign as a director and chairman of the company. However, in the subsequent meeting of the board of directors, the proposal was not passed and Lu Zhengyao continued to serve as chairman.
At this point, the senior management of Ruixing secretly split into two groups around whether Lu Zhengyao should resign as a director and the board of directors. One is the management camp dominated by Lu Zhengyao, and the other is the investor and independent director camp represented by Li Hui, Liu Erhai and Shao Xiaoheng. A person familiar with the matter said that after the audit firm Ernst & Young found that Ruixing’s financial fraud, the latter actively supported the disclosure of Ruixing’s fraud, and had been actively promoting internal self-examination, but was blocked by Lu Zhengyao.
Finally, in the special shareholders’ meeting of lucky coffee on July 5, Lu Zhengyao, Liu Erhai, Li Hui and Shao Xiaoheng were collectively out of the board of directors and no longer served as members of the board of directors. However, it seems that Lu Zhengyao was only out in name and left behind all the “Pro Lu faction”. The proposals at the shareholders’ meeting were also put forward by Haode investment, a family fund controlled by Lu Zhengyao.
After this adjustment, Ruixing’s board members changed from Lu Zhengyao, Guo Jinyi, Wu Gang, Cao Wenbao, Liu Erhai, Li Hui, Shao Xiaoheng and Zhuang Weiyuan to Guo Jinyi, Wu Gang, Cao Wenbao, Zhuang Weiyuan, Zeng Ying and Yang Jie.
Guo Jinyi, Wu Gang and Cao Wenbao, who are left behind in the board of directors, are considered to be supporters of Lu Zhengyao, while Zeng Ying and Yang Jie are nominated by the shareholder body controlled by Lu Zhengyao. This also means that Lu Zhengyao has completed the clean-up of the board of directors and parted ways with the other two people, Li Hui and Liu Erhai, who have been fighting together for many years in the “iron triangle of capital market”.
So far, at the policy level, the financial fraud and delisting storm has temporarily ended with the punishment of domestic and foreign departments.
In China, on September 22, 2020, the State Administration of Market Supervision announced a total penalty of 61 million yuan for Ruixing’s two domestic operation entities and 43 third-party companies; in foreign countries, the “first boot” has also been implemented. On December 17, the securities and Exchange Commission announced that it had reached a settlement with lucky coffee over its financial fraud, and lucky would pay a civil fine of $180 million.
In the future, lucky still faces class actions from investors in the United States and Canada, as well as penalties from the U.S. Department of justice and the Chinese Ministry of finance. In this regard, lucky has taken a series of measures, including closing poor performing stores, adjusting non core business resources, optimizing product mix, pricing and discount policies, etc.
2. The “Shenzhou Department” behind it: doing business while doing business
Ruixing was born out of the “Shenzhou family”.
In October 2017, lucky’s first store opened in the lobby of Beijing Shenzhou Youche headquarters. The earliest recruitment office is also located on the top floor of the superior car headquarters. Until the listing, all the capital and per capita around Ruixing are closely related to Lu Zhengyao.
At the beginning of its establishment, Ruixing’s 1 billion start-up fund came from the angel investment of Lu Zhengyao, chairman of the board of directors of Shenzhou Youche, and self raised by the team. According to the prospectus, in 2017, the company controlled by Lu Zhengyao, Qian Zhiya and Chen Min provided interest free loans of 94.7 million, 50 million and 10 million to lucky coffee respectively.
Ruixing’s early senior management team is also a “Shenzhou Department”. The chairman of the board is Lu Zhengyao, chairman of the board of directors of Shenzhou Youche, who is also the largest shareholder; the CEO is Qian Zhiya, Lu Zhengyao’s most powerful right arm, and the COO is Liu Jian, former head of income management of Shenzhou Youche; Ruixing has successively obtained 550 million investment, of which 400 million comes from the “capital iron triangle” of Shenzhou department. Li Hui, founder of Dazheng capital, and Liu Erhai, founder of pleasure capital, are both long-term supporters of Lu Zhengyao’s capital. They have followed Lu Zhengyao all the way from China to now, but now they have turned against each other.

In the eyes of the outside world, Lu Zhengyao is good at capital manipulation, and he never likes to play cards according to the rules. In the impolite words of the former chairman of the Securities Regulatory Commission, it is the “villain” of the capital market. Tencent’s shenzhen.com quoted a board member of lucky, who asked to be anonymous, as saying that according to the investigation results of the special committee, Lu Zhengyao and other senior executives were involved in fraud and interfered with the investigation, which was enough to be prosecuted for criminal responsibility.
Lu Zhengyao’s Shenzhou department had three most successful capital operations. For the first time, Shenzhou premium car was merged into Shenzhou rental car. Shenzhou Youche is the core platform of Lu Zhengyao’s Shenzhou department, with a market value of more than 40 billion yuan, but it has been losing money and can not be listed in a shares. While another listed company controlled by Lu Zhengyao, Shenzhou rentche, can make profits, but its market value is not high.
Subsequently, by purchasing the shares of Shenzhou car rental in succession, Shenzhou car rental was consolidated in 2018. Although Shenzhou car rental still suffered losses in 2018, its financial statements showed a profit of 270 million yuan.
The second time is the acquisition of baowo by Shenzhou Youche. This is the key transaction to enlarge the assets before the listing of Shenzhou Youche. In March last year, Shenzhou acquired 67% of baowo’s equity. At the beginning, it only participated in the transaction as a behind the scenes buyer. Then, through Wang Baiyin, the buyer in front of the console, it completed the financial report showering, and successfully reduced baowo’s total assets by 1 / 3. The wonderful thing is that it didn’t reach 50% of the total assets of Shenzhou Youche. Finally, the acquisition did not constitute an important asset restructuring.
Because if it is an important asset restructuring, this asset will not be listed until at least two years later.
The third time is the launch of lucky coffee. Lu Zhengyao and his team successfully completed the listing through rapid expansion, rapid money burning and refinancing. Before the IPO, the equity of lucky coffee was highly concentrated in the hands of Lu Zhengyao and his close associates, namely, Lu Zhengyao family trust (30.53%), Qian Zhiya family trust (19.68%), Mayer investments funds (12.4%), Dazheng capital (11.9%) and pleasure capital (6.75%).
The above-mentioned shareholders held 81.26% equity of lucky coffee before the listing, which also made the outside world think that lucky coffee’s listing was just a capital Carnival of Lu Zhengyao’s family and friends.
It was not until recently that this crazy capital game ended in the tragedy of delisting and leaving the board of directors. However, it is not difficult to see from this “Gong Dou” storm that although Lu Zhengyao is not on the board of directors, he still seems to be able to control the whole company.
Article 101 of Ruixing’s articles of association shows that there are two ways to remove directors: one is to pass an ordinary resolution of the general meeting of shareholders, which requires the consent of more than 50% of the shareholders; as of June 26 last year, the Lu Zhengyao family still controls 37.2% of Ruixing’s voting rights, and Qian Zhiya also controls 7.9% of Ruixing’s voting rights, with the total voting rights of the two reaching 45.1%, far higher than other shareholders. It shows that Lu Zhengyao still has the ability to remove Guo Jinyi, which can be achieved by uniting with individual shareholders.
The second is to hold a meeting of the board of directors. In addition to the directors concerned, no less than two-thirds of the directors present vote for it. That is to say, at least five directors need to vote for it. The removal can be approved. Once the chairman loses his position as a director, he can no longer serve as the chairman of the board of directors. In fact, as a major shareholder, Lu Zhengyao can easily start and realize the removal of directors.
3. Business or a good business?
After going through delisting, store closing and management exchange, Ruixing not only didn’t fall down, but seemed to live better.
In December 2020, after investigating lucky, the Cayman Islands released a financial report of the latter for the first three quarters of 2020. The report showed that the revenue of the first three quarters of 2020 were 565 million yuan, 980 million yuan and 1145 million yuan respectively, of which Q3 revenue increased by 35.8% year on year.
At the same time, since May 2020, the profitability of the store level has been continuously improving, and the balance of revenue and expenditure at the store level was realized for the first time in August. As of November, more than 60% of the self operated stores of lucky coffee have realized profits. According to the report, the revenue scale of lucky coffee in 2020 is 3.8-4.2 billion yuan.
According to the report, the number of lucky coffee stores decreased from 4507 to 3898, including 894 affiliated stores. In the first three quarters, lucky coffee closed 65, 378 and 448 stores respectively. In the second and third quarter after lucky storm, the total number of stores closed reached 826. In closing at the same time, lucky did not stop opening. In the first three quarters of 2020, the number of new stores opened by lucky is 69, 134 and 133 respectively. Ruixing hopes to expand the number of Direct stores to 4800 to 6900 by 2023.
How is lucky’s coffee business getting better and better?
Lucky’s problem is to burn money to expand, but the reason to survive is real demand. The biggest reason for Ruixing’s falsification of major financial data may lie in its rapid expansion speed, which makes Ruixing have to burn a lot of money to maintain its whole market. Coupled with the influx of capital from Shanghai, Ruixing has embarked on a vicious circle of burning money, expansion, attracting capital and burning money again. But back to the essence of business, coffee has always been a good business.
In the view of a lucky investor, coffee has the characteristics of high frequency, high gross profit and high viscosity. In addition, coffee is easy to be standardized, unlike tea, which has regional differences, and the supply chain management is relatively simple. Therefore, although it has experienced delisting, management staff exchange, and the number of stores has decreased, Ruixing has not been sold or acquired, but has achieved profitability and growth.
The reason for survival is that the advantages of the product still exist.
First, the fundamental logic of China’s coffee market may have changed.

Coffee used to be a high-end lifestyle for Chinese people, but now coffee is more everyday for most of the migrant workers. The purpose of drinking coffee is to supplement enough caffeine to support them working overtime. Under such circumstances, Chinese coffee began to appear obvious grading, including instant coffee with less than 5 yuan, liquid coffee with 5-10 yuan, convenience store and fast food shop coffee with more than 10 yuan, and brand shop coffee represented by lucky and Starbucks.
Compared with 30 yuan Starbucks coffee, lucky’s advantage lies in locking in the 10-30 yuan coffee market. At present, it only costs 9.9 yuan to open the app and buy a cup of lucky coffee. For many white-collar workers, they don’t want to drink coffee from convenience stores with relatively poor taste, but they think it’s expensive to drink Starbucks, so lucky has become the best choice.
Second, the main cost of this coffee business is not in coffee, but in stores, marketing and other non coffee costs. The single cup cost of lucky is about half of that of Starbucks, and the main difference lies in the rent. When lucky starts to slow down and stop throwing money, the revenue obviously starts to improve.
Moreover, it is undeniable that users in the beverage industry have certain stickiness, which will last for a long time once they form the habit of users. Therefore, although Ruixing’s previous money burning has driven a group of users to collect wool, a group of people who have formed the habit of users will be screened out later to continue to consume. Instead, they can promote Ruixing’s survival with their real needs.
At present, as long as there is no problem with lucky’s coffee supply chain and products, the coffee story can go on. But at present, everyone is worried that lucky will not die of products, but may die of infighting.
According to media reports, Lu Zhengyao had already registered a new company and dug a group of people from Ruixing before the civil war. The operation route was the same as that of Ruixing when he was founded.