Guosheng Securities: Is Luckin Coffee good? Blind tasting test shows the real results

"Is Luckin Coffee good to drink?" This seems to have become a point of contention among different groups of people regarding the prospects for the development of the coffee industry. Recently, Guosheng Securities released a research report titled "Perspective on Luckin Coffee", which conducted a blind tasting experiment on the taste and quality of Luckin Coffee for the first time. Its conclusion effectively ended this topic and gave the company a "buy" rating for the first time, with a target price of $43.68 per ADS.

A blind tasting experiment is to rank the taste of the coffee you drink without knowing the brand of the coffee. Guosheng Securities chose latte coffee without sugar or any other flavoring for the experiment, and compared three brands: Luckin Coffee, Starbucks, and convenience store coffee. The blind tasting results of 50 subjects were unexpected. 28 people thought Luckin Coffee was the "best", 20 people thought Luckin Coffee was "better in the middle", 18 people thought Starbucks was the "best", and another 18 people thought Starbucks was "better in the middle".

This conclusion is very different from the doubts that Luckin Coffee has been facing on a daily basis. Therefore, Guosheng Securities believes that the real evaluation of Luckin Coffee’s taste among consumers should be much higher than the negative evaluation it has received in public opinion. As a local coffee chain in China, Luckin Coffee hired coffee professionals to specially prepare "Master Coffee" suitable for Chinese tastes. It is indeed more targeted at the Chinese market and has been widely recognized by consumers.

The taste of coffee is the foundation of Luckin Coffee, and its business strategy is the key to judging its future development. Guosheng Securities found through research that in mature overseas coffee consumption markets, coffee is more of a "daily drink" attribute, and only a small number of people regard it as a spiritual experience. For "daily drinking" coffee, taste and price are the key factors that influence people's choices, and in these two aspects, Luckin Coffee has advantages that cannot be ignored compared to Starbucks and convenience stores.

Luckin Coffee is facing a growing demand for "daily good-tasting" coffee, which is a rapidly growing market space, and Luckin Coffee has almost no competitors in this field. After examining the development experience and historical nodes of the Japanese market adjacent to China, Guosheng Securities concluded that for a long time in the future, China's coffee consumption will maintain a relatively high growth rate, and the compound growth rate of freshly brewed coffee represented by Luckin Coffee will be between 1.5 and 3 times that of the former.

Combining the perspective of the unit cost, single-store sales volume and unit price of Luckin's freshly made beverages and light meals in each quarter, Guosheng Securities found that there is still a lot of room for improvement in Luckin's store sales and coffee prices in the future, so a single store is expected to achieve very considerable profits.

At this stage, Luckin Coffee still needs to open stores quickly to seek to form a physical barrier, occupy people's minds about "daily drinking" and "delicious" coffee, and form a certain mental barrier. On this basis, Guosheng Securities believes that the current market's estimate of Luckin's overall actual net profit, which is growing rapidly, has led to a partial underestimation of Luckin's value. Therefore, Guosheng Securities expects Luckin's net profit attributable to shareholders to be -4.07 billion, -2.46 billion, and 2.50 billion in the next three years, respectively. The first coverage is given a "buy" rating with a target price of US$43.68/ADS.

Luckin Coffee started its trial operation in January 2018 and went public on the Nasdaq on May 17, 2019, raising $695 million and becoming the fastest company in the world from inception to IPO. As of June 25 this year, Luckin Coffee has opened 2,698 stores nationwide. On July 8, Luckin Coffee announced the launch of more than 10 Xiaolu Tea products in nearly 3,000 stores in 40 cities across the country, and invited celebrity Liu Haoran to be the new spokesperson to enter the new tea beverage market. This is another move to expand its product category after its listing.