Sunac’s 15bn yuan investment in LeEco is baffling to investors

Volatile share movements suggest mixed, if not baffling market sentiment toward the deal

PUBLISHED : Wednesday, 18 January, 2017, 1:50pm
UPDATED : Wednesday, 18 January, 2017, 6:45pm

Sunac China Holdings has been confronted with consistent doubts from investors over its 15 billion yuan investment into cash-starved LeEco, with volatile share trading this week evidence of a mixed, if not baffling attitude toward the deal.

The developer’s Hong Kong-listed shares swung between big losses and minor gains on Monday and Tuesday, amid investor concerns over the lack of synergy between the real estate and internet companies. Sunac traded 1 per cent up as of 1.22pm Wednesday.

Shenzhen-traded Leshi Internet Information & Technology also fluctuated violently from a 10 per cent gain to big losses on Monday and Tuesday, before trading down 1.67 per cent to 38.3 yuan at 1:53pm Wednesday.

Sunac extended a life line to the cash-strapped LeEco empire, becoming its second-largest shareholder, after announcing on Friday it would acquire an 8.61 per cent stake in Leshi Internet Information & Technology, LeEco’s video streaming unit, as well as a 15 per cent stake in LeEco’s film production unit and a 33.5 per cent stake in LeEco’s television hardware subsidiary, with a combined value of 15 billion yuan for all three investments.

Sun Hongbin, chairman of Sunac China, and Jia Yueting, chairman of LeEco hosted a press conference in Beijing on Sunday where they disclosed details of what they called their “love at first sight” encounter and how the deal was sealed after 35-days of extensive due diligence.

Still, on a Monday teleconference held by China International Capital Corp, the two were besieged by questions from investors and analysts. According to a transcript of the meeting obtained by the South China Morning Post, Jia and Sun were questioned over the source of the funding, how it would be used, whether Sunac would scale up the investment, and the investment rationale, among others.

Sun told investors that the money wouldn’t be used in LeEco’s cash-burning electric car business, which many analysts consider to be a black hole. He said the 15 billion yuan investment in LeEco accounted for only a small portion of the developer’s cash balance and forward revenue flow. A Sunac executive disclosed on Sunday that the firm’s cash balance was more than 60 billion yuan.

As part of the deal, Sunac will have representatives on Leshi’s board, as well as supervisors assigned to LeEco’s smartphone and car businesses, both of which are not listed.

Troubled LeEco lands 16.8 billion yuan lifeline after selling stakes in video, movie assets to Sunac China

David Hong, head of research at China Real Estate Information’s Hong Kong office, who had attended the Monday meeting, was unconvinced. Like other analysts, Hong is concerned whether the LeEco investment would further strain Sunac’s already stretched balance sheet. Then there’s the lack of synergy between Sunac’s property business and the fast moving internet and tech hardware businesses of LeEco, and Sun’s decision to diversify into the non-property sector.

“We generally believe Sun is a wise businessman, but he has repeatedly promised that he will not foray into the non-property sector. What is happening now raises questions over the credibility of the management,” he said.

“I’m not familiar with LeEco. But from the property perspective, that 15 billion yuan could be used to buy land, in return for a safe 30 billion yuan revenue,” Hong added. “Lots of Chinese developers talk up ‘diversification’. That may work in the mainland stock market, but not in Hong Kong.

“Maybe we can’t see the justification because there are some hidden benefits of the deal that Sun didn’t tell us.”

Tianjin-based Sunac struck 13 deals totalling 22.8 billion yuan over the past 12 months, a compilation of public data showed, pushing up its annual contracted sales to 155 billion yuan, but also increasing its net gearing ratio from 85 per cent in mid-2016 to 115.2 per cent by the end of 2016. All the deals were property related, except the latest one.

We see limited synergies between Sunac and the Leshi companies over the next 12 months
 

Sunac has set a 210 billion yuan sales target for 2017. During Monday’s meeting, Sun reassured analysts and investors that he has no further major investment plans this year, but on Sunday said Sunac is looking at non-property opportunities in the entertainment, health, finance and natural resources sectors.

S&P said on Tuesday that the Leshi deal adds uncertainty to Sunac’s financial position and

reduces the company’s capacity for future land acquisitions. The event was seen as “credit negative” but its ratings were unchanged.

“We see limited synergies between Sunac and the Leshi companies over the next 12 months. Moreover, the investment is unlikely to generate stable cash flows for Sunac,” S&P said.

CMB International maintained its “sell” position on Sunac, while Eric Zhang, an industry analyst with CICC who chaired Monday’s meeting, changed his position on Sunac from a “buy” to “hold” on the same day. CICC declined an interview request for this story.

“Many friends had tried to persuade me to back off. I’ve seriously considered their opinions. But I don’t feel their opinions are enough to overthrow my decision. I don’t think they know LeEco,” Sun said on Sunday.

On Monday, Sun and Jia further assured investors that Sunac in the future could secure large swathes of land from governments “using LeEco’s internet concept”. Jia said LeEco has a 487 hectare plot of land in Zhejiang where its new car manufacturing plant is being built.