SINGAPORE (Apr 30): Legendary billionaire investor and Berkshire Hathaway CEO Warren Buffett once said: “Only when the tide goes out do you discover who’s been swimming naked.” The recession that followed the dotcom crash in 2000 and the 9/11 terrorist attack in 2001 saw the unravelling of high-flying energy firm Enron, telco WorldCom as well as conglomerate Tyco. As the 2008 recession unfolded in the aftermath of the subprime mortgage crisis, former Nasdaq chairman Bernie Madoff admitted to running a Ponzi scheme by cooking the books of his hedge fund, which delivered consistently high returns in good times and bad. The current coronavirus-induced recession has so far not produced a single high-profile bankruptcy, though one Chinese firm, Luckin Coffee, is now on the brink. 

The Xiamen-based coffee chain operator had emerged as yet another icon of the high growth consumer business in China, with huge sums of early-stage funding that helped position it as a threat to behemoth Starbucks Coffee. In May last year, Luckin listed in the US with much fanfare, boasting a stratospheric valuation of more than 30 times its annual sales and losing almost as much money on every cup of coffee it sold as it spent on actually making it. At its peak in January, with a market capitalisation of around US$12.5 billion ($17.75 billion), Luckin was trading at over 50 times its expected annual sales. Not even the fastest-growing software firms command such a valuation. 

Within eight months of its listing, Luckin’s luck was running out and its business model was coming undone. On April 2, it disclosed that nearly half of the revenues it had reported in the last three quarters of last year — or RMB2.2 billion ($440 million) — was fake. Luckin blamed chief operating officer (COO) and board director Liu Jian for the misconduct, which came to light after an internal investigation by its auditors Ernst & Young found that Liu and several other employees had overstated early revenue figures. On April 26, State Administration for Market Regulation, China’s top business regulator, raided Luckin’s headquarters and is likely to continue searching documents and electronic records for weeks. China Securities Regulatory Commission, the agency that regulates listed companies, had earlier denounced Luckin’s “misconduct” and is separately investigating the coffee chain operator.

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