Hedge-Fund Manager Who Helped Expose Luckin Coffee’s Fraud Bets on Chinese Chain’s Comeback

“I never would have thought the company could come back. Many nearly impossible things happened,” Mr. Ma said. His firm on Monday released a slide presentation and 81-page report making a bullish investment case for five-year-old Luckin, which has revamped its business and corporate governance over the past two-plus years.

Luckin went public on the Nasdaq Stock Market in May 2019 and was forced to delist in June 2020 after revealing that some of its former executives and employees fabricated more than $300 million in sales. The company’s disclosure followed an anonymous report that was published by American short seller

Carson Block

of Muddy Waters LLC. The report, which said Luckin was inflating its sales, was produced by Snow Lake, the Journal reported previously. Mr. Ma declined to comment on whether his firm was involved in the 2020 short-seller report.

Luckin’s audacious fraud caused investors in the company to lose billions of dollars, stunned Chinese and U.S. regulators and made the company a poster child for the need for tougher accounting oversight for foreign companies listed on American stock exchanges. A Wall Street Journal article in May 2020 revealed that several companies involved in inflating Luckin’s sales and expenses had ties to then-chairman Charles Lu.

Since their delisting, Luckin’s American depositary receipts have continued to trade over the counter. The company was fined by Chinese regulators, reached a settlement with the U.S. Securities and Exchange Commission, went through bankruptcy-court proceedings and settled lawsuits from creditors and shareholders.

Luckin emerged from bankruptcy in March this year and is now controlled by Centurium Capital, a Beijing-based private-equity firm that was also an early investor in the company. The company has replaced most of its top management and ousted its former chairman, chief executive and other employees who carried out the earlier fraud.

Luckin shares have gained more than 80% this year, giving the company a valuation of about $4.4 billion. The company has resumed its expansion in China, opening more stores, and grown sales by selling a range of coffee-based beverages that appeal more to Chinese consumers’ tastes. Luckin posted an operating loss of $85 million in 2021 and reported net profit of $108 million for the year after booking a one-off accounting gain.

“I’m buying Luckin because I think it is only a matter of time that the company overtakes

Starbucks

SBUX -0.64%

in China,” Mr. Ma said.

He added that Luckin now represents about 15% of the assets managed by Snow Lake. He declined to comment on how many Luckin shares he holds or his firm’s assets under management, saying only that it is smaller than the $3 billion it disclosed in early 2021. Snow Lake closed its Asia fund at the end of 2021, and still has two funds that focus on China.

The firm’s new Luckin report, published on

Futu,

a popular Chinese retail-trading platform, said the company should be worth $15 billion. That is based on the firm’s projection that Luckin should achieve 2.8 billion yuan in net profit in 2024, equivalent to about $390 million in today’s dollars, and a multiple of 35 times earnings, similar to its estimate of the valuation of Starbucks’s China business.

Snow Lake said Luckin is growing sales quickly and expanding its customer base in part by rolling out more coffee-based beverages like “Brown Sugar Boba Latte” and coconut milk lattes that mask the bitter and sour taste of coffee with “more fat and sweet tastes,” according to its presentation. Snow Lake said it also expects Luckin to deepen its penetration into smaller Chinese cities. Starbucks, by comparison, is more popular in larger cities.

China’s zero-Covid policy has sapped consumer confidence over the past year. While many retail outlets have struggled with periodic lockdowns across the country, Luckin’s no-frills stores that focus on “grab-and-go” have helped the chain weather the disruptions, according to Snow Lake’s report. It added that Luckin may face a growth slowdown after China lifts its pandemic restrictions.

The report, which Snow Lake began assembling early this year, was completed in August. Snow Lake’s research included online consumer surveys that involved more than 100,000 Luckin customers, Mr. Ma said. He also said that he had no communication with Luckin while preparing the report.

Luckin’s revenue is closing in on Starbucks, whose recent sales in China have been depressed by the country’s pandemic restrictions. Luckin’s reported revenue grew 72% to $493 million for the three months ended June 30. Starbucks’s sales in China, on the other hand, dropped 44% to $544.5 million in the quarter ended July 3.

There were 7,195 Luckin stores in China at the end of June, versus Starbucks’s 5,761 stores in the country as of July 3.

The American chain recently reported $775.6 million in revenue from China for the 13 weeks ended Oct. 2, down from $964 million for the year-earlier period, which covered 14 weeks through Oct. 3, 2021. Starbucks also said it now has more than 6,000 stores in China.

CEO

Howard Schultz

said earlier this month that Starbucks remains confident in its long-term growth opportunity in China, and that it will emerge “as the undisputed leader in our category” after the country’s Covid disruptions have abated.

Mr. Ma, a China-born, U.S.-educated investor who previously worked at a hedge fund for Ziff Brothers Investments, said he intends to hold Luckin shares for years, as long as the company continues to grow. While a bullish bet by Snow Lake on casino operator

MGM China Holdings Ltd.

has performed poorly, Mr. Ma said he is very optimistic about Luckin’s prospects—and the possibility that it could relist in the U.S.

“I’m telling the world this is a good company. I have vetted it. I have done my homework,” he added.

Write to Jing Yang at Jing.Yang@wsj.com

Corrections & Amplifications
Luckin posted an operating loss of $85 million in 2021. The company reported net profit of $108 million for the year after booking a one-off accounting gain. An earlier version of this article incorrectly said Luckin’s net profit in 2021 was $107 million and didn’t mention its operating loss. (Corrected on Nov. 9)