Starbucks’ China challenger Luckin Coffee will likely price IPO at high end of range or above

A logo of Luckin Coffee is seen at a store in Beijing.

Wang Zhao | AFP | Getty Images

Luckin Coffee will likely price its initial public offering at the high end of its expected range, or possible above that, a source with knowledge of the deal told CNBC on Thursday.

The company and its advisors are set to begin final pricing discussions shortly, but the source said investors may expect the IPO to price as high as $18 per share. The person said that there’s a possibility that Luckin may upsize the amount of American depository shares sold in this offering.

The Chinese coffee company’s expected range was $15 to $17 per share, according to a regulatory filing last week. Luckin plans to list Friday on the Nasdaq with the ticker “LK.”

In its most recent funding round, the Beijing-based chain was valued at $2.9 billion.

“Not since the dotcom bubble of 1999-00 has a company achieved a $3 billion public valuation less than two years after its launch,” said Kathleen Smith, a principal at Renaissance Capital, which tracks and invests in IPOs.

With 2,370 stores open at the end of the first quarter and plans to add 2,500 this year alone, Luckin is trying to overtake Starbucks as the biggest coffee chain in China. Since it was founded less than two years ago, the company has tried to build a customer base with smaller locations formatted for convenience and offering steep discounts.

In 2018, the chain reported net sales of $125.3 million and a net loss of $241.3 million. To cover its losses and pay for its ambitious expansion plans, Luckin has raised $550 million so far, according to Crunchbase.

“As a result, the key controversy is whether Luckin can generate sales in the absence of discounts,” Bernstein analyst Sara Senatore wrote in a research note last week.

China is one of Starbucks’ long-term growth markets, along with the U.S. The global coffee giant, which is celebrating its 20th year in China, wants customers to treat its stores as a third place — the spot aside from home and work where consumers hang out and relax. The Seattle-based company has tried to meet Chinese customers’ eagerness for convenience by partnering with Alibaba to deliver its drinks.

Starbucks saw transactions at stores in China open at least a year fall 1% during its second quarter, meaning that traffic was declining. But customers were spending more, leading to same-store sales growth of 3%.

Starbucks’ stock, which has a market value of $95.8 billion, is up 22% so far this year.

CEO Kevin Johnson has said the company’s rivals in China are focused on short-term gains, while Starbucks is using a long-term strategy.

“Some of those competitors are competing through heavy, heavy discounts that we don’t believe are sustainable,” Johnson said recently on CNBC’s “Squawk on the Street. “

Luckin’s debut will not only depend on how investors view its ability to compete with Starbucks, but also current market conditions. Recent escalations in the trade war between China and the U.S. have led to market volatility as investors brace for a new round of tariffs.

So far this year, 54 companies have raised $20 billion in the U.S. IPO market, with Uber’s debut responsible for about 40% of that number, according to Renaissance Capital data. Uber and rival ride-hailing giant Lyft have struggled since their debuts, but the rest of this year’s newly public companies are doing well. Of the year’s IPOs, 63% are trading above their IPO price, Smith said.

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