Aggressive Store Expansion And Light Milk Tea Innovations Will Drive Revenue Growth And Profitability

Key Takeaways

• Aggressive store expansion and new product lines are boosting market share, diversifying offerings, and enhancing customer engagement, driving revenue growth.
  
• International expansion and strategic marketing are geared towards long-term growth and brand prestige, aiming to improve profitability and net margins.
  
• International expansion efforts, rising expenses, and sales price reductions pose risks to profitability and financial stability, impacting net margins and market strategy.

Catalysts

Offers retail services of freshly brewed drinks, and pre-made food and beverage items in the People's Republic of China.

• Luckin Coffee's aggressive store expansion strategy, with a net increase of 1,382 stores in the third quarter, including entering lower-tier cities and international markets, is likely to increase market share and drive revenue growth.
  
• The introduction of new product lines, such as the Light Milk Tea series and innovative collaborations, is expected to diversify the product offerings and enhance customer engagement, contributing positively to revenue growth.
  
• Continuous investment in supply chain integration and the establishment of new production centers aim to ensure consistent product quality, potentially improving operational efficiency and profit margins.
  
• Expansion into international markets like Singapore, despite initial losses, represents a long-term growth opportunity that may enhance future earnings as the operations become profitable.
  
• Increased emphasis on marketing and brand recognition, including strategic investments in brand collaborations and product education, is likely to elevate brand prestige and drive sales, improving net margins and overall profitability.

Luckin Coffee Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Luckin Coffee's revenue will grow by 21.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.5% today to 9.7% in 3 years time.
• Analysts expect earnings to reach CN¥5.6 billion (and earnings per share of CN¥15.82) by about December 2027, up from CN¥2.4 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 2.7x on those 2027 earnings, down from 19.9x today. This future PE is lower than the current PE for the US Hospitality industry at 23.6x.
• Analysts expect the number of shares outstanding to grow by 7.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.59%, as per the Simply Wall St company report.

Luckin Coffee Future Earnings Per Share Growth

Risks

• The same-store sales growth (SSG) for self-operated stores showed a negative 13.1% growth, reflecting fluctuations and potential challenges in maintaining sales consistency, which could impact revenue stability.
  
• The company's expansion into the international market, such as Singapore, has not yet achieved profitability, adding financial strain and potentially affecting net margins if sustained losses continue.
  
• There is a noted decrease in the average selling price of products, which suggests a pricing strategy that could pressure revenue and potentially compress net margins if not compensated by volume growth.
  
• The increase in sales and marketing expenses by 53.2% year-over-year, as a percentage of revenue, highlights the need for substantial investment to maintain brand recognition and market position, which could impact earnings if not efficiently managed.
  
• Financial losses from overseas operations and the complexities associated with establishing international business models, such as in the highly competitive U.S. market, present risks to earnings and the overall financial outlook.

Valuation

• The analysts have a consensus price target of CN¥33.95 for Luckin Coffee based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CN¥57.3 billion, earnings will come to CN¥5.6 billion, and it would be trading on a PE ratio of 2.7x, assuming you use a discount rate of 8.6%.
• Given the current share price of CN¥23.26, the analyst's price target of CN¥33.95 is 31.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.