This article is from the WeChat public account: Deep Exploration (ID: deep_insights) < span class = "text-remarks">, author: deep exploration, title figure from: vision China

MuddyWaters Research, a big short known for its short-listed stocks, released a 89-page short report on Ruixing Coffee.

The author of the report sent 92 full-time and 1400 part-time investigators, collected more than 25,000 small tickets, performed 10,000 hours of store video, and collected a large number of internal WeChat chat records. Cargo data increased by 69% in the third quarter of 2019 and 88% in the fourth quarter of 2019. At the same time, it was pointed out that Rui Xing had overstated its advertising spending by more than 150% in the third quarter of 2019, especially on Focus Media.

As soon as the news was disclosed, Ruixing’s stock price fell more than 20% intraday.

At the same time, Muddy Waters said on Twitter: “We received an unidentified report of 89 pages, claiming that Ruixing Coffee was a scam: ‘In the third quarter of 2019 and the fourth quarter of 2019, every The daily number of goods in the store is exaggerated by at least 69% and 88%, respectively, with 11,260 hours of store traffic video as proof. ‘We think this work is credible. “

Ruixing Coffee has not yet responded to the short report.

The short report collected 25,843 small tickets from 1,000 users.

The following is the core content of the short report of selected translations:

Executive Summary

When Ruixing Coffee went public in May 2019, it was basically a failed business that instilled a coffee culture in Chinese users through high discounts and free gifts.

After its $ 645 million IPO, the company began faking financial and operating data from the third quarter of 2019 and has evolved into a scam. A series of results announced by the company show that its business has experienced a dramatic inflection point, and its stock price has risen by more than 160% in more than two months. Not surprisingly, it successfully raised $ 1.1 billion in January 2020 (including secondary placements) .

Ruixing knows exactly what investors are looking for, how to position itself as a growth stock with a wonderful story, and what key indicators are manipulated to maximize investor confidence.

This report consists of two parts: Fraud and Basically Collapsed Business. We show how Ruixing falsified data and why its business model has inherent flaws.

Part 1: Fraud beginning in the third quarter of 2019

Iron Smoking Gun Evidence # 1


Number of items per store per day inflated by 69% in 2019 3Q and 88% in 2019 4Q, supported by 11,260 hours of store traffic video

The number of products per store per day increased by 69% in the third quarter of 2019, and increased by 88% in the fourth quarter of 2019.

Since the fourth quarter of 2019, we have tracked 981 stores offline, and each store only sells 263 products per day. (The lucky document shows that in Q3 2019, the number of products sold per store per day is 444, and the estimated Q4 is 483-506)


We mobilized 92 full-time and 1,418 part-time employees to monitor the scene. We successfully recorded daily passenger flow of 981 stores, covering 100% of the business hours of 620 stores. The store selection method is based on the distribution of city and location types. The 4,507 directly operated stores with Ruixing are expected to open at the end of 2019.The situation is the same. Ruixing’s 4,507 stores are distributed in 53 cities, and we cover 38 cities, of which 96% of stores are located in these cities. The location type of the store is determined by analyzing the detailed address of the Ruixing store: we divide the store into offices, shopping malls, schools, residences, transportation, hotels, etc.

We counted the foot traffic of each store and recorded videos from door opening to closing, with an average of 11.5 hours per day. When we check the traffic and recorded videos again, if the video surveillance loses more than 10 minutes of footage, we will discard a whole day of data. Our success rate is only 54%, so all success data is 100% complete.

… (discussion on data rigor)

This is evidence to notify store managers of the surge in pickups on November 23, 2019.

However, there is a clever part here: Company management may think that more and more investors and data companies are starting to track their order numbers as part of the due diligence process, so “jump orders” are misleading Easy way for investors. In order to understand the scale of online order inflation, we randomly selected 151 offline tracking stores-days to track their online orders. We place an order at the beginning and end of store hours to get the number of online orders for the day. We found that the number of online orders in the same store on the same day swelled from 34 to 232, with an average of 106 orders per day or 72% of offline orders on average.

Smoking Gun Evidence # 2

Luckin ’s “Items per order” has declined from 1.38 in 2019 2Q to 1.14 in 2019 4Q

Ruixing’s “single product” dropped from 1.38 in the second quarter of 2019 to 1.14 in the fourth quarter of 2019.

Since the fourth quarter of 2019, we have collected 25,843 receipts from 10,119 customers in 2213 stores in 45 cities. 25,843 receipts show 1.08 and 1.75 pick-up and delivery notes for each order, or a mix of 1.14 sheets (99% confidence level) . This marks the continuous decline in the number of single items per order, from 1.74 in the first quarter of 2018 to 1.14 in the first quarter of 2019.


This trend can be attributed to the drop in delivery order contributions, as people naturally tend to buy more items to meet free shipping requirements. Ruixing said that by visiting our store, we found that most customers who pick up the package only buy one kind of freshly ground beverage, because in most cases, the coupon can only be used for one item in the order. According to company introduction and management communication, the proportion of delivered orders did decrease from 61.7% in the first quarter of 2018 to 12.8% in the third quarter of 2019, and further decreased to approximately 10% in early January.

Smoking Gun Evidence # 3:


We gathered 25,843 customer receipts and found that Luckin inflated its net selling price per item by at least RMB 1.23 or 12.3% to artificially sustain the business model. In the real case, the store level loss is high at 24.7 % -28%. Excluding free products, actual selling price was 46% of listed price, instead of 55% claimed by management.

We collected 25843 customer receipts and found that Ruixing has increased the net selling price of each item by at least 1.23 yuan or 12.3%, artificially maintaining this business model. In reality, losses at the store level are as high as 24.7% -28%. Excluding free products, the actual sales price is 46% of the listing price, instead of 55% claimed by management.

Ruixing reports that each product in the third quarter of 2019The net selling price is RMB 11.2. During the earnings conference call on November 13, 2019, Ruixing’s CFO and COO Reinout Schakel guided higher prices for the fourth quarter of 2019. However, our 25843 receipts show a net selling price of only 9.97 yuan, which means that compared to the reported situation, the inflation rate is 12.3% (99% confidence level and 1% statistical error, which means that we 99% determined that the price was between 9.87- 10.07 yuan, with a 1% error.

Excluding free products, the prices of freshly ground beverages and other products are 10.94 yuan and 9.16 yuan, respectively. Compared with the reported situation, the inflation rates are 12.3% and 32%, respectively. Excluding free products, the actual sales price is 46% of the listing price, instead of 55% claimed by management.

Ricky ’s chief financial officer, Reinout Schakel, avoided questions about boosting sales during the earnings call. However, our receipts show that they started offering free beverage vouchers to existing users even from the fourth quarter of 2019, while previously they only offered free beverage vouchers to new and invited users. It is speculated that the proportion of free items in the documents submitted by each company is declining.

Reinout Schakel, Ruixing ’s chief financial officer, said they continue to increase what they are already paying forThe number of people in the price. Our receipts show exactly the opposite. Even in mature markets with more mature customers, the effective price stagnates at RMB 10, excluding free products. There is no positive correlation between the net selling price of each product and the operating month.


Reinout Schakel, Ruixing’s chief financial officer, mentioned at a recent Citibank meeting in January that more than 63% of customers pay 15-16 yuan per cup of coffee. In the company’s report for the third quarter of 2019, they stated that 63% of products sold for more than 50% of the retail price. However, these are all too good to be true and contradict our receipt findings.

Our receipt shows that only 28.7% of the products were sold for more than 50% of the list price. In fact, the price of most products is between 28% -38% of the list price. Ruixing’s core customers are still very price sensitive. Only 39.2% of customers paid more than RMB 12 and 18.9% of customers paid more than RMB 15 per cup of coffee.

Why is ASP important? If investors remember Luckin’s sensitivity analysis of store profitability in his speech, they will find that ASP is a key factor in store profitability. They point out that with 400 items per store per day, the price of each item is 16 yuan, and the store-level profit margin can reach 28.4%. In the management’s analysis, the earnings per share which is closer to the actual situation is lower than the lower limit of 12 yuan.Knowing how to be ignored, this represents a more difficult prospect of profitability.

In actual conditions, that is, 263 pieces per store per day, the net selling price is 9.97 yuan, and according to the management statement, the store-level loss is 28.0%. Note that all numbers are provided by management. Taking a step back, we give the company some credit to achieve economies of scale by delivering free coffee, and reduce costs in the figures reported in the second quarter of 2019, and store-level losses are still as high as 24.7%. At the current price level, they can only achieve store-level profitability by selling 800 items per store per day, otherwise they must increase the effective selling price to a minimum of 13 yuan. That’s why they need to make up ASP numbers to maintain their business model.

Smoking Gun Evidence # 4:


Third party media tracking showed that Luckin overstated its 2019 3Q advertising expenses by over 150%, especially its spending on Focus Media

Third-party media tracking shows that Ruixing has overstated its advertising spending by more than 150% in the third quarter of 2019, especially on Focus Media.

Ruixing disclosed the quarterly advertising expenditure before March 31, 2019 in the prospectus. After the IPO, its advertising expenses can be calculated by a breakdown of acquisition costs for new customers in its quarterly profit report.

In the second quarter of the 2019 financial report conference call, the company disclosed for the first time that Focus Media accounted for 140 million yuan + total advertising expenditure of 140 million yuan in the second quarter of 2019 (they only explained 154.5 million yuan and accounted for 242 million yuan 64% of total advertising spend).

Data tracked by CTR market research shows that Ruixing overstated advertising spending by more than 150% in the third quarter of 2019: In the third quarter of 2019, CTR hinted that Focus Media ’s expenditure was 46 million yuan, accounting for only 12% of Ruixing’s advertising spending is much lower than the previous quarters. Assuming that Ruixing ’s non-fragmented media advertising spending in the third quarter of 2019 is comparable, Ruixing exaggerated its advertising spending by 158%.

CTR market research tracks actual advertising broadcasts of different brands in various media channels, including all three majorMedia’s Focus Media Channel: LCD Network (Office Building Elevator) , Poster / Digital Frame Network (Residential Elevator), and Cinema Network-Zhan 82%, 17%, and 1% of Focus Media’s total revenue in the first half of 2019, respectively, based on Focus Media’s 2019 interim report.

The following is the monthly results of CTR ’s tracking of Ruixing ’s advertising spending on Focus Media channels. Luckin’s spending fell to its lowest level between September and November 2019, but rebounded in December 2019.


The dollar amount in the CTR raw data is the media list price, which may be much higher than the actual advertising spend.

To calculate the conversion rate between list price and advertising expenditure, we calculated the total reported revenue of CTR Tracking Focus Media’s (002027 CH) The conversion rate of ads broadcasted by Focus Media. According to data from the first quarter to the third quarter of 2019, the actual revenue of Focus Media is approximately 8% of the price of the CTR tracking media list.

According to the accounting policies listed in Focus Media ’s financial report, Focus Media ’s advertising revenue is recognized “at the time of advertising” and tracked by CTRThe advertisement aired at the same time, when should Ruixing book the advertising cost.

CTR also publishes monthly, quarterly, and annual largest advertiser reports on its website based on tracking results. For example, in May 2019, (Link) , CTR pointed out that Ruixing is all the media channels it tracks . It is worth noting that 83% of Luckin’s tracking advertising budget for the month was for LCD display networks, 12% for poster / digital frame networks, and 5% for theater networks.

However, Ruixing ’s rankings in LCD display and poster / digital box advertising dropped rapidly in June and July 2019, and even dropped out of the top 10 from August 2019.

So where did the money go?

A similar clue can be found in the exaggerated store profits and advertising costs.

Ruixing claims to have achieved “store-level profitability” in the third quarter of 2019. Combining solid evidence 1 to 3, Ruixing actually hides the loss at the store level below the store level, rather than really exceeding the break-even point at the store level.

The real case of Ruixing store-level results is the sales of 263 items per store per day, with ASP of 9.97 yuan. Compared with real cases and reported cases, Ruixing Group overstated store operating profit by 397 million yuan in the third quarter of 2019. Coincidentally, the difference between the advertising expenditure reported by Ruixing and the actual expenditure of Focus Media tracked by CCTV is 336 million yuan, which is almost the same as the exaggerated store operating profit. In addition, these two misstatements became apparent from the third quarter of 2019. It is possible for Ruixing to reuse its exaggerated advertising expenses for fraudulent revenue and store profits.

Smoking Gun Evidence # 5


Luckin ’s revenue contribution from “other products” was only about 6% in 2019 3Q, representing a nearly 400% inflation, as shown by 25,843 customer receipts and its reported VAT numbers.

Richshing ’s revenue contribution from “other products” was only 6% in the third quarter of 2019, which represents nearly 400% of inflation based on 25,843 customer receipts and reported VAT figures.

Rui Xing’s ambition is by no means to start a coffee company. Its mission is “everyone’s daily life, starting with coffee!” This makes “other products”, that is, non-cooked beverages such as light meals, juices, nuts, mugs, etc.-an important product reportedly Revenue contribution increased from 7% in the second quarter of 2018 to 23% in the third quarter of 2019, and project contribution increased correspondingly from 6% to 22%.

However, in the 981 working days we tracked, only 2% of pick-up orders found non-made products. 25,843 receipts further show that 4.9% and 17.5% of the distribution orders are “other products”, accounting for 6.2%, which is an expansion of nearly 400%. Once again, people naturally tend to buy more “other products” to meet the requirements of free shipping. However, if the order rate in the second quarter of 2018 dropped sharply from 62% to nearly 10% now, why did the “% of revenue from other products” rise from 7% to 23% during the same period?

Ricky ’s latest F-1 form addsThe value-added tax rate also supports our findings: according to the State Administration of Taxation of the People’s Republic of China, the value-added tax rates for sales of goods and services are different. The VAT rate is 6% for services provided, such as the sale of brewed products or delivery. For the sale of goods, such as the sale of packaged food and beverages, that is, “other products”, in the case of Ruixing, the VAT rate has been 13% (or 16%) since April 2019. The VAT invoice we received after shopping at Ruixing further confirmed this (see sample below) . Based on Ruixing’s income classification, we can calculate a mixed VAT rate and compare it with company reports.

Weighted average net income contribution by product category%, we found that the calculated VAT rate is fully consistent with the reporting in the fourth quarter of 2018, the full year of 2018 and the first quarter of 2019 before listing.

However, in the second and third quarters of 2019, this gap suddenly widened, with the reported VAT rate of 6.5% compared to the actual calculation of 7.6%. From another perspective, in order to be consistent with the reported 6.5% VAT, the revenue contribution of other products will actually be 7%, which is very close to 6.2% of 25843 invoices, while the company reports 22%- twenty three%.

In this case, the actual revenue contribution of “other products” in the third quarter of 2019 was 6% -7%, or Ruixing had tax evasion.


In order to confirm that the VAT rate for other products is 13%, we have purchased some products at Ruixing and asked for VAT records. It clearly shows 13% VAT for nuts, muffins, juices, etc., and 6% freshly brewed beverages and delivery charges. Anyone who wants this information can request VAT records through Ruixing’s app after purchase.

Red Flag # 1: Luckin’s management has cashed out on 49% of their stock holdings (or 24% of total shares outstanding) through stock pledges, exposing investors to the risk of margin call induced price plunges

(or 24% of the total issued shares ) , which exposes investors to the risk of stock prices plummeting due to margin calls. Ruixing management emphasized that they have never sold any shares in the company; however, they have cashed out through stock pledge financing. The number of mortgaged shares is almost half of their entire shares and is worth $ 2.5 billion at current prices.

Red Flag # 2: CAR (699 HK) déjà vu: Charles Zhengyao Lu and the same group of closely-connected private equity investors walked away with USD 1.6 billion from CAR (699 HK) while minority shareholders took heavy losses

Looks familiar: Lu Zhengyao