What do the deep-pocketed Middle Eastern investors aim to obtain by injecting a huge sum of 6.7 billion yuan to take a stake in Luckin Coffee?

On September 10, Luckin Coffee received an investment of about 1 billion US dollars from the Middle East's Abu Dhabi sovereign wealth fund Mubadala.

However, this sum of money will not be used for new shares issuance, nor will it enter Luckin's account — Mubadala purchased 241 million old shares from Centurium Capital, obtained a board seat, and became a strategic shareholder.

The money is paid to old shareholders, and what Luckin gets is sovereign endorsement and Middle East resources. Behind this transaction is the reality that Luckin's domestic same-store sales dropped by 5.3%, US stores are loss-making, and the Middle East market remains to be developed.

What it wants is not cash, but time and resources.

01

Luckin raised 70 billion yuan, and the Middle East wealthy group invested

On September 10, Abu Dhabi sovereign wealth fund Mubadala Investment Company announced that it has jointly completed the investment in Luckin Coffee with Centurium Capital, the controlling shareholder of Luckin Coffee, with an amount of about 1 billion US dollars, equivalent to about 6.7 billion yuan.

Mubadala joined as a minority shareholder. But this is not Luckin's issuance of new shares, but a transfer of old shares centered on Success Cup Limited.

1. Adopt old share transfer, the money will not enter Luckin's account

Different from general financing, this sum of money will not directly enter Luckin's corporate account.

According to the document of the U.S. Securities and Exchange Commission on September 9, on September 5, Success Cup Limited signed an agreement with Centurium Capital and CCM Lucky to purchase 241 million convertible preferred shares.

The money for buying stocks is mainly raised through bank loans, and the shares and related rights and interests are mortgaged to the bank; the investment company under Mubadala contributes in this way to indirectly obtain part of Luckin's equity. The money is given to old shareholders, not to Luckin.

2. Purchasing preferred shares can obtain a board seat, which is not a pure financial investment

After the transaction is completed, as long as Mubadala holds more than 5% of Luckin's shares, it can nominate a director to Luckin's board of directors.

This seat transforms it from a financial investor to a strategic investor, and can participate in important board matters such as capital operation, major investment and merger and acquisition.

After the transaction, Centurium Capital still holds about 22.08% of Luckin's equity, including 571 million Class A common shares and convertible parts, firmly holding the position of the largest shareholder;

Mubadala becomes the most important international strategic ally besides Centurium, officially becomes Luckin's minority shareholder, and obtains a board seat.

3. Spend 1 billion US dollars to buy old stocks, and all three parties get what they want

Why is it "old preferred shares" instead of "new corporate shares"?

For Centurium Capital, Luckin is an important part of its consumer business layout.

It participated in the investment in early 2017, led the restructuring after the fraud incident in 2020, and together with IDG and SSG took over the shares of parties related to the original management in 2022, gradually transforming from a financial investor to a controlling shareholder.

However, the old fund has held Luckin's preferred shares for many years, and LPs are facing maturity pressure, needing to recover funds and reduce the weight of a single asset.

The transfer of 241 million shares through Success Cup is not a complete exit, but to let the sovereign fund take over, and separately handle short-term liquidity and long-term control rights.

For Mubadala, it is the Abu Dhabi sovereign fund with an AUM of about 3850 billion US dollars and an investment cycle of up to ten years, which does not profit from short-term stock price spreads.

What it wants is minority equity in a leading Chinese consumer enterprise, Centurium's industrial execution capability as a GP, and the possibility of Luckin's landing in the Middle East.

By purchasing the preferred shares of the old fund, Centurium's control right remains unchanged, Mubadala obtains convertible assets and board seats, with less friction.

4. Transform from financial investment to strategic binding, sovereign funds also begin to enter the market

The attitudes of both sides have been made clear.

Mohamed Abdulla, Head of Mubadala Asia, Mohamed Abdulla said he is optimistic about the Chinese consumer market. Luckin relies on technology and data to drive operations, takes digitalization as the foundation in customer maintenance, new product R&D, store management and other aspects, plus a large number of stores and fast iteration, can capture consumer preferences faster.

Chen Weihao, Partner of Centurium Capital, Chen Weihao welcomed Mubadala, believing that it has rich industry experience, global perspective and extensive resource network, which can help Luckin continue to innovate.

Luckin does not increase new share issuance, avoiding further dilution of earnings per share.

Although there is no new cash inflow, the introduction of a sovereign-level strategic investor is equivalent to using equity structure adjustment in exchange for resource network. Luckin is currently listed on the OTC market, if it returns to the main board or carries out international capital operation in the future, long-term sovereign LPs are more suitable as valuation stabilizers than hedge funds.

Therefore, the essence of this transaction is not "raising money because of lack of funds", but "equity restructuring + resource integration": Centurium helps the old fund LPs solve maturity exit and capital recovery, while maintaining control rights;

Mubadala obtains part of the equity of the Chinese consumer giant, board seats, convertible assets, and Centurium's industrial execution capability as a GP;

Luckin does not dilute EPS due to additional issuance, but obtains sovereign endorsement and resource channels.

02

Luckin's intention:

Exchange equity for time, exchange resources for space

Putting the Q2 financial report together with this transaction, Luckin's purpose of introducing Mubadala is very obvious: What it wants is not cash, but time, manpower and material resources.

1. Domestic market: same-store sales down 5.3%, new stores support revenue

Luckin's second quarter financial report. Revenue reached 15.886 billion yuan, a year-on-year increase of 28.5%; operating profit reached 2.123 billion yuan, a year-on-year increase of 22%; average monthly transaction customers reached 113 million, a record high;

There are 36,310 stores worldwide, 2714 new stores added in the first quarter, and more than 5000 new stores added in the first half of the year. Looking at these data alone, Luckin is still expanding rapidly.

However, there are two pieces of information in the financial report worth noting.

The first is same-store sales. In Q2, same-store sales of self-operated stores decreased by 5.3%, compared with a 13.8% increase in the same period last year. The company attributed it to the large subsidy intensity of takeaway platforms and high base last year.

Guo Jinyi mentioned at the performance meeting that the contraction of takeaway subsidies is faster than expected at the beginning of the year, and the pressure of high base has been reflected in the same-store data of the second quarter, and the pressure will continue in the third quarter.

This means that Luckin's domestic development mode has changed. In the past, it relied on densifying stores and increasing the number of cups per store to drive same-store growth;

Now new stores bring revenue increment, but same-store sales drag down profits. Revenue is mainly maintained by opening new stores, and marginal benefit per store declines.

The second is cost.

Material cost reached 6.124 billion yuan, a year-on-year increase of 34.3%; store rent and other operating expenses reached 3.614 billion yuan, an increase of 35.6%;

Sales and marketing expenses reached 925 million yuan, an increase of 56.1%, accounting for 5.8% of revenue; general and administrative expenses increased by 33.8% to 985 million yuan. Net profit reached 1.486 billion yuan, a year-on-year increase of 16.1%, but the growth rate is lower than the revenue growth rate of 28.5%.

Revenue increased by 28.5%, but profit only increased by 16.1%, and the cost ate up the difference.

The store area is larger, the variety of goods is more, labor and rent are rising, and the commission of takeaway and live streaming platforms is increasing.

Luckin in China has moved from the stage of densifying stores and improving same-store performance to the stage of maintaining growth with new stores and controlling marginal profit with middle platform.

The characteristics of this stage are: revenue can still grow by opening stores, but the recovery of profit margin depends on operation efficiency, and the improvement of operation efficiency requires time.

The domestic price war is still ongoing, the 9.9 yuan price band and discounts from Cotti, Lucky Coffee, Starbucks China and other brands are intertwined, and there is no possibility of stopping in the short term.

Overseas market: the US market is losing money, and the Middle East is the next incremental market

By the end of the second quarter, Luckin had 223 overseas stores, including 89 self-operated stores in Singapore, 20 self-operated stores in the United States, and 114 franchised stores in Malaysia. 46 new stores were added in this quarter.

The situation of the three markets is quite different.

Singapore is the fastest growing. 89 self-operated stores, according to media reports citing management statements, have achieved store-level profitability.

This proves that Luckin's "Chinese middle platform + overseas self-operation" model is feasible in markets with concentrated Chinese people and similar consumption habits.