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LeEco

Shares in LeEco group companies plunge after founder reveals cash crunch

Technology giant suffering from expanding too fast and in too many directions, says Jia Yueting

PUBLISHED : Monday, 07 November, 2016, 12:28pm
UPDATED : Monday, 07 November, 2016, 11:01pm

Chinese technology giant LeEco’s shares plummetted on Monday after founder Jia Yueting said the company is facing a shortage of cash and suffering from rapid expansion in too many directions.

“LeEco’s expansion is too fast, and that has caused great challenges to our organisational capacities and fundraising,” Jia said in a lengthy letter to employees on Sunday.

The company, which has invested in several high-tech products ranging from electric cars to smartphones, has been burning cash to support its global expansion, which had outpaced its funds and resources, he said.

LeEco acquired US television manufacturer Vizio in a US$2 billion (HK$15.5 billion) deal in August to aid its expansion plans in the North American market. It has also made huge investment in its electric cars, both under its own brand LeSee and in partnership with US carmaker Faraday Future.

Jia said the car business’ investment alone has surpassed 10 billion yuan (HK$11.4 billion), and consequently he had run out of enough cash to support LeEco. The automobile unit in September raised more than US$1.08 billion from a consortium of Chinese investors.

“We blindly sped ahead, and our cash demand ballooned. We got over-extended in our global strategy. At the same time, our capital and resources were in fact limited,” said Jia.

Apologising to shareholders Jia pledged to cut his annual salary to a nominal 1 yuan.

The internal letter came amid growing concerns about the high-flying company, which has expanded from streaming videos to among other things smart televisions and sports. The too rapid expansion has caused some analysts to question the company’s financing modalities.

As news of Jia’s letter to employees surfaced on Monday, the company’s shares took a hammering on the bourses, with both its listed entities seeing huge plunges.

Shenzhen-listed Leshi Internet Information & Technology dropped as much as 7 per cent to a one-year low before closing at 37.85 yuan, down 4.68 per cent. The stock has fallen 14.6 per cent since last Wednesday when rumours surfaced that LeEco had defaulted on payments to suppliers. Since then the company has seen nearly 12.8 billion yuan worth of its market value being wiped out.

Hong Kong-listed Coolpad Group, a smartphone maker, plummeted as much as 25 per cent on Monday to its lowest since February 2013. The stock closed 17.56 per cent lower at HK$1.08.

In the letter, Jia said the strategy of burning cash to sustain expansion will come to an end as the company is moving toward a moderate phase of growth,

“In the past, we were burning cash to subsidise users so as to achieve bigger scale,” Jia wrote. “Now, our ecosystem strategy must enter a second stage quickly, moving away from cash burning, instead we want to have deeper penetration in the market.”

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