IPOs: Money-Burners DouYu, Luckin Look to Wall Street for Cash

Bottom line: Live streaming gamer DouYu should get relatively strong demand for its $500 million New York IPO, while a smaller listing plan by younger coffee specialist Luckin is likely to die on the vine.

One of the longest runs I can recall for New York IPOs by Chinese firms continues to chug ahead, with two new filings, one by live streaming game operator DouYu and the other by a high-tech Starbucks (Nasdaq: SBUX) challenger called Luckin. This particular IPO window is now rapidly creeping up on its second anniversary and doesn’t seem to show too many signs of running out of steam.

The big difference between companies coming to market now is that many are younger and still losing big money, compared with companies earlier in the wave that were older and mostly profitable. That’s not too surprising, since usually the most profitable companies move to the front of the line because they’re naturally more attractive.

By comparison, I really don’t see that much attractive in DouYu and especially in Luckin. In the case of Luckin, the company is going to market just two years after its founding, which smacks of opportunism and also a certain degree of desperation. But more on that shortly.

Let’s begin with DouYu, since that’s the larger and slightly more attractive of these two offerings, in my humble opinion. The company comes from the hot live-streaming space, with a focus on games, and has filed for an IPO to raise an impressive $500 million. (English article) The company says it’s first in its class in the area of esports, with more than 150 million users signing in each month to watch or play on its platforms.

DouYu’s revenue is growing quite strongly, roughly doubling to about 3.7 billion yuan ($550 million) last year. But its net loss also widened last year, though by a less severe 44 percent, to 883 million yuan. The company launched its platform in 2014, making it a relatively youthful five years old. But the numbers do seem to be trending in the broadly right direction, since revenue is growing far faster than the company’s losses.

Babe in the Woods

By comparison, Luckin is just a babe in the woods, having only been founded two years ago and opening its first coffee shops just a year and a half ago. Whereas I’m not that familiar with Douyu, I’m quite familiar with Luckin since there’s one in the lobby of my building and I now go there each day for my morning coffee.

One thing I can say about this company is they’re extremely aggressive. They offer nonstop promotions to get people hooked, and also have a relatively intriguing business model of forcing everyone to use their app. No onsite orders are accepted, and neither is cash. They also have a minimalist approach to their stores, which are quite small with little or no seating and staffed by just two or three people.

The company’s rapid expansion and aggressive promotions means it is rapidly burning through cash, even as it’s posting some relatively impressive revenue for such a young firm. It had 2,370 stores in China at the end of March, which is no small feat for someone that young. (English article). It posted about 480 million yuan in revenue in this year’s first quarter alone, which is already more than half of its total for all last year. But it also posted a 572 million yuan loss for the quarter, again not too surprising given its aggressive ways.

Luckin is looking to Wall Street investors for $100 million, which sounds relatively modest. But honestly speaking, this is a company that is probably still years away from profits at best, and I personally doubt they will live long enough to ever reach profitability at all. They are certainly giving Starbucks a run for their money here in China at the moment, mostly due to their aggressive marketing.

At the end of the day, I do expect that DouYu will attract some investor attention due to its first-in-class status. Rival live streamer Huya (NYSE: HUYA) made its own New York IPO about a year ago, and its shares are now about double the listing price, meaning people see some value in this space. By comparison, I doubt investors will see much value in Luckin’s money-burning ways, and could easily see this particular IPO getting scrapped due to lack of interest.