Why Sun Hongbin took a shine to LeEco

The Chinese property tycoon's bold investment in a sprawling, troubled technology play raised eyebrows. Investors are nervous, but there are grounds for optimism, too.

When Jia Yueting, the founder of Chinese technology company LeEco, got a visit from one of the country’s billionaire property tycoons in December, he thought it would be little more than an informal catch-up, according to someone close to the situation. But as Sun Hongbin peppered the younger man with questions, it was clear he had something very specific in mind.

Sun, the chief executive of Sunac China Holdings, asked Jia whether he had considered a strategic partnership. He discussed the possibility of Sunac moving into other industries. The two men shared their thoughts on the prospects of LeEco, a sprawling technology conglomerate.

In all, Sun Hongbin and Jia Yueting spent more than six hours talking during their first meeting in LeEco’s Beijing headquarters, before heading to drinks and dinner, according to the source. Barely a month later, they announced that Sunac had agreed to inject $2.19 billion into the company.

The deal makes Sun Hongbin just the latest Chinese property tycoon to invest outside of his own business. That shows his ambition — but it also makes some of his investors nervous.

Laying the ground

Sunac is a company that has attempted several headline-grabbing investments, not always with the most success. But the latest bet is one of its boldest. Sunac has invested Rmb6.04 billion ($880 million) in Leshi Internet Information and Technology, taking an 8.61% stake. It also invested Rmb1.05 billion in LeEco’s film production unit, Leshi Pictures, and Rmb7.95 billion in Leshi Zhixin, which is known for its TV set-top box.

As a result of the investment, Sunac gets two out of five board seats in the main listed entity, Leshi Internet Information and Technology, and the articles of association have been changed so that a board decision needs a two-thirds majority to proceed.

Sunac will also put its own finance managers into the two unlisted units, which the group has promised to inject into the listed vehicle by 2019.

The investment was equivalent to more than 50% of Sunac’s market capitalisation as of February. But Sun Hongbin sounded optimistic.

“I am proud to say I know Leshi’s financial conditions better than Jia Yaoting,” Sun said in a press conference in January. “Our investment in Leshi lays the ground to building Sunac’s future for the next five to 10 years.”

That is a bold claim considering the problems faced by LeEco, the holding company for a sprawling family of businesses that includes sports media, cloud computing, online music and movies and smart TV. In a letter to employees in November last year, Jia admitted that the company was suffering from a cash crunch due to its rapid expansion from smartphones to electric cars.

The bad news has not abated since the deal was announced. LeEco was looking to sell a 49-arce property in Silicon Valley which it bought from Yahoo a year earlier, according to a March 17th report by Reuters, citing anonymous sources. Three weeks later, the troubled Chinese company was said to delay payrolls for its US staff, according to a Bloomberg report. Just yesterday, a deal to buy US entertainment hardware manufacurer Vizio was scrapped and replaced with a partnership agreement.

In response to FinanceAsia's enquiries, Sun of Sunac said the decision to invest in LeEco was not "a philanthropic one" and a decision on providing any further capital to LeEco would be considered thoroughly.

Sunac’s investment in the company has certainly raised eyebrows. Ivan Chung, an analyst at Moody’s Investors Service, told FinanceAsia that it was too early to say what synergies would exit between the two companies. But Moody’s has stressed the risks of the investment, changing Sunac’s ratings outlook to negative, in part because of the company’s lack of experience in the technology sector.

Some investors have also questioned the logic of the deal. Sun has won the admiration of many investors, having emerged stronger after several failed attempts at founding a property empire before he found success with Sunac.

But there is a risk that his investment in LeEco experiences the same kind of problems as a string of moves by Chinese tycoons to expand into businesses where they have little expertise.

“Sun is a well respected figure in China’s property market, but his investment in a tech conglomerate is likely to cause concern over its short-term stability and results,” according to a Shanghai-based investor in both companies. “It reminds me of how frequently the CEO has changed at Dalian Wanda’s e-commerce unit. It is an uphill battle for property developers to venture into technology and internet-of-things.”

Could Sunac be an exception?

Sun, an engineer-turned-entrepreneur, is lauded in China’s corporate world, in large part because he has proved able to overcome adversity.

In the late 1980s, when Sun was working at Lenovo as a computer salesman, he quickly caught the attention of Lenovo founder Liu Chuanzhi. Liu made him a corporate development manager less than two years after he joined and, for a time, Sun was seen as a natural successor.

But the rising star fell from grace shortly afterwards. In 1992, Sun was found guilty of embezzling Rmb130,000 and was sent to jail for five years. He was released in early 1994. In 2013 a judicial review found him innocent of the charge.

After coming out of prison, Sun borrowed Rmb500,000 from Lenovo’s founder and set up Sunco, a property agency in Tianjin. He quickly expanded into property development after a year, but the venture was not the barn-storming success Sun appeared to be hoping for. Sunco was sold to Road King in 2006.

Learning his lesson, Sun founded Sunac in Tianjin in 2003, focusing on high-end residential projects. The move has been undeniably successful. Sun’s 53.16% shareholding was worth more than $2 billion in February.

Sun came to the attention of international investors in 2015, when he attempted to bail-out Shenzhen-based property group Kaisa, bidding $1.2 billion for a 49% stake in the rival developer. But after considering how to restructure a roughly $10 billion debt load that Kaisa had accumulated at home and abroad, he backed away from the deal. Kaisa became the first Chinese homebuilder to default on US dollar debt in April 2015.

Things to do

LeEco was certainly not in such dire straits when Sun agreed to inject $2.19 billion into the company, but he has again made a move on a company that, to many observers, appears to be struggling.

LeEco has made some aggressive plays, including paying Rmb2.7 billion for the rights to broadcast China’s football premier league for the next two years. But according to Leshi’s latest financial statement, its operating cash fell 33% in the nine months to September.

This time, however, Sun opted to stick to his guns. He appears committed to the company, calling Jia “a rare asset” who was able to make Sun understand “the concept of an internet ecosystem” — crucial knowledge for a man who now owns a sizeable chunk of one of China’s technology conglomerates.

Jia first started his business empire with Leshi, an online video-streaming platform sometimes dubbed China’s Netflix. As well as its failed deal for Vizio, the parent company, LeEco, spent at least another $1 billion building an electric car plant in Nevada through its investment in Faraday Future. 

Faraday Future has been one source of problems for LeEco. The California-based startup, which LeEco financed, suspended construction of the new factory in December, due in part to overdue payments to its contractors.

However, despite concerns over production capacity, Faraday Future in January unveiled the prototype for a high-end electric car, FF91, with which Jia hopes to challenge for a slice of the market pioneered by Telsa.

But a big part of the appeal to Sun appears to be in LeEco’s role in the burgeoning ‘internet of things’ sector, which Sunac wants to integrate into the smart housing projects it is planning to build.

It remains to be seen how such a large, bold play will work out for  a company that has previously had an impressive focus. At a press conference in January, Sun said it was the first time he had felt “such a big impetus” to invest outside of the property sector.

Sunac’s shareholders will be hoping that it will not be his last.

¬ Haymarket Media Limited. All rights reserved.
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