LeEco: China's tech Icarus helps restructure listed unit's debt

The company that once aspired to be China's Netflix agrees a deal on debt with Shenzhen listed Leshi. But Leshi, toiling under a $1 billion debt mountain, is not out of the woods.
Jia Yueting, in happier times
Jia Yueting, in happier times

Leshi Internet, the major listed unit of debt-ridden Chinese technology conglomerate LeEco, reached a deal with its unlisted parent as it seeks to overcome an Rmb 6.7 billion ($1 billion) debt mountain.

The move is the latest twist in an Icarus-like downfall of LeEco, which once aspired to be a Chinese tech giant combining the best of Tesla, Apple and Netflix but found itself in a cash crunch as it struggled to fund its ambitious expansion.

In a statement on Tuesday night, Leshi said it expected to receive Rmb1.37 billion under a share transfer agreement with another LeEco subsidiary. The company's statement did not clarify where LeEco was getting the money from, and LeEco spokespeople did not respond to repeated calls. FinanceAsia was therefore unable to verify Chinese media reports that Jia Yueting, LeEco's founder and a fugitive in the United States, was behind the payment.

For investors hoping to grab a slice of China's emerging tech industry, that affair underlines the difficulties of picking through opaque corporate structures in a distressed debt situation. After all, the main potential loser in the Leshi crisis is savvy developer Sunac Holdings, which became the company's second-biggest shareholder in a bailout deal early in 2017.

Leshi said it planned to sell more assets to shore up its balance sheet, including its financial unit, which could fetch Rmb 1.73 billion. In the past 30 days, the company has issued at least five statements to warn investors that its losses could impact its listing status.

“The share transfer and asset disposal do not generate new cash flow for the company, therefore the company’s debt problem remains,” Leshi said in a statement to the Shenzhen Stock Exchange on late Tuesday night.

According to a Beijing-based investor familiar with LeEco’s thinking, the cash crunch at Leshi and LeEco remains severe, in part because of the reputation of Jia. The founder last year defied orders from Beijing's regulators to return to China.

But the investor thinks LeEco is past the worst, thanks to new investments from some of China's tech heavyweights. In April, an investor consortium led by Tencent and JD.com invested Rmb 3 billion into LeEco’s smart television unit. The sale saw Leshi’s stake in the unit fall to 33.46% from 40.31%.

“On a positive note, LeEco is still in talks with strategic investors to overcome its financial and operating challenges,” the source told FinanceAsia on condition of anonymity because he isn’t allowed to speak to the press.

The investment underlines the fact that LeEco's technology is still inticing to investors.

“For corporate and strategic investors, the company’s assets are still valuable, but it needs to get the right executives with relevant industry experience to run the operations.” the source said, after a recent meeting Leshi management.

Jia, whose assets in China have been seized by court orders, is now in the United States, working full time for his troubled electric car startup Faraday Future.

It's all a far cry from LeEco's explosive fundraising and eye-catching spending on its way up. The parent raised some $700 million in three rounds, according to Crunchbase data, while its LeSports arm was valued at $3.3 billion after white-hot fundraising.

It put its money on a connected future, building an ecosystem that would combine technology, autos, content and more.

An early sign, perhaps, of the group's hubris was its huge spending on sports rights. LeSports paid $400 million per year for the rights to show English Premier League soccer in Hong Kong, doubling the fee paid by Richard Li's PCCW — despite the fact it lacked a channel to show the games on. It soon found itself sharing games with PCCW and, eventually, ran out of cash to broadcast key games.

Sunac China, the country's fourth largest developer, emerged as a white knight to bail out LeEco. Its investment took in not only Leshi but also film production house Leshi Pictures and Leshi Zhixin, which makes TV set-top boxes.

However, Sunac’s bold move failed miserably over a short period of time. Sun Hongbin, the chairman of Sunac, admitted in March this year his investments in LeEco was a complete failure and cost his company to write down more than $2.6 billion of losses. Sun stepped down as the chairman of Leshi in March after just eight months.

Leshi shares have plunged since LeEco's troubles came to light in 2016. So far this year, Leshi saw its market capitalisation decline more than 83%, as its cash burn continues. Leshi reported a loss of Rmb13.88 billion for 2017, while it had net assets of Rmb 663 million for the same period. Its net gearing ratio reached over 103% last year, up from 67% the prior year, its financial statements show.

¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media