Chairman Appointment And Store Expansion Will Open Global Markets

Key Takeaways

• Strategic expansions and governance improvements aim to enhance revenue, market share, and global growth through increased store openings and market penetration.
  
• Product innovation, operational efficiencies, and strategic marketing initiatives are set to drive demand, enhance margins, and support long-term financial growth.
  
• Rising costs and competition pose risks to margins, while store and market expansions face execution and demand challenges potentially impacting profitability.

Catalysts

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

• The appointment of Mr. Li Hui as Chairman is seen as a key move for strengthening governance and driving global expansion, which can lead to increased revenue and earnings through improved strategic execution and international market penetration.
  
• Luckin Coffee's aggressive expansion strategy, with an additional 1,743 net new stores this quarter, is expected to boost market share and revenue, especially with the opening of more stores in high-potential locations.
  
• The focus on product innovation and quality upgrades, such as the introduction of new beverages and enhancements to existing offerings, is designed to boost customer demand and drive sales growth, thereby increasing net revenues.
  
• Operational efficiency improvements and cost management, enabled by increasing scale and strategic supply chain enhancements, support Luckin's ability to expand operating margins and enhance net profitability.
  
• Strategic marketing and customer acquisition initiatives have significantly increased the customer base and transaction volume, which are expected to support longer-term revenue growth and enhance overall financial performance.

Luckin Coffee Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Luckin Coffee's revenue will grow by 15.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 9.6% today to 9.5% in 3 years time.
• Analysts expect earnings to reach CN¥5.5 billion (and earnings per share of CN¥14.69) by about May 2028, up from CN¥3.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥6.3 billion in earnings, and the most bearish expecting CN¥4.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.9x on those 2028 earnings, down from 22.6x today. This future PE is lower than the current PE for the US Hospitality industry at 22.6x.
• Analysts expect the number of shares outstanding to grow by 0.75% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.82%, as per the Simply Wall St company report.

Luckin Coffee Future Earnings Per Share Growth

Risks

• Rising coffee bean prices could negatively impact gross margins in the latter half of 2025 as new inventory is built at these higher costs, which may constrain net profits.
  
• Increased competition from other beverage companies entering the market could pressure Luckin Coffee to invest more in branding and marketing, affecting operating expenses and net margins.
  
• Expansion into new markets, both domestically and internationally, carries execution risk, which could lead to higher operational costs and affect profitability if the expected growth does not materialize.
  
• Although the current net profit increase is driven by favorable product mix and operational efficiencies, maintaining such growth could be challenging if consumer preferences shift or operational costs rise, potentially impacting net margins.
  
• The company's rapid store expansion might lead to increased fixed costs, and if the anticipated consumer demand does not continue, it could affect same-store sales growth and overall revenue.

Valuation

• The analysts have a consensus price target of $38.837 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 2028, revenues will be CN¥57.7 billion, earnings will come to CN¥5.5 billion, and it would be trading on a PE ratio of 21.9x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of $34.2, the analyst price target of $38.84 is 11.9% 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.