Luckin Coffee is getting its business model right, helping the Chinese coffee chain gain ground on global giant Starbucks.

Quo Vadis Capital president John Zolidis, a long-term company follower, was once a bear on Luckin's stock, raising red flags on the company's accounting processes and business strategy. In June 2020, Luckin was delisted from the Nasdaq and fined $180 million by the SEC.

That was when the Beijing-based coffee chain opened coffee shops rapidly in an attempt to catch up and surpass industry leader Starbucks. But it didn't happen, in part because the two companies have different store concepts.

Starbucks' store concept is the "third place," a comfortable spot where people can enjoy mixed espresso drinks with friends and associates away from home and work. This store concept makes the demand for Starbucks products inelastic, meaning that it can charge a premium price for its products over the competition and maintain profitability.

Luckin's store concept is "coffee to go," where people can pick up a cup of joe on the move. Unfortunately, this setting makes the demand for its products elastic, meaning that it cannot charge premium prices for its products and maintain profitability.

That's at the root of the company's woes, which eventually filed for bankruptcy in the U.S. But after Luckin emerged from bankruptcy last year, Zolidis turned bullish on the company, as he liked its turnaround plan and growth potential. As it turned out, he was right again, with the stock since doubling.

This week, Luckin reported financial results that beat Zolidis' bullish expectations, with revenues rising 65%, ahead of the 42% his model predicted. In addition, the EBITDA margin came at 15%, up from 3.7% last year and above Zolidis' 13.3% estimate. Earnings per share (EPS) in RMB was 1.86 ahead of our 1.05 and vs. 0.37 last year. In USD, revenues came at $546M, and fully-taxed EPS was $0.21.

That's thanks to the rebuilding of the company and the strengthening of the brand, according to Luckin Coffee chairman and CEO Dr. Jinyi Guo.

"During the last two years, we have rebuilt our teams across the organization, bringing in some of the industry's top talent," Guo said. "From research and development to legal, our teams are positively impacting our performance and being recognized for outstanding work."

Lugan's numerous industry awards include the "Top 50 Emerging Chinese Consumption Brands with Strong Growth of the Year (2022)" by CBNData, and the "Top Chinese Brand 2022" from YiMagazine

Luckin's solid financial results come against a challenging macroeconomic environment, with lockdowns hampering service spending. Moreover, Zolidis estimates a restaurant-level margin (calculated consistent with U.S.-based restaurants) of 32.6%, up more than 600 bps.

"This restaurant level margin (RLM) is approaching SBUX's targeted China RLM of 35%," he said in a research note. "Unit growth was 28% Year-over-Year (YOY) for company-operated stores, ending with 5,373 units. The partnership-operated stores jumped 69% YOY to 2,473."

Zolidis thinks these estimates support the bull case, as the company is an early-stage high Return on Invested Capital (ROIC) compounder.

"At $19, shares remain attractive, in our opinion," he said. "We also still have a potential uplisting and the resumption of analyst coverage as positive catalysts for LKNCY."