FINANCING
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LeEco

Chinese billionaire Jia Yueting’s vision of an empire to rival Apple, Tesla and Amazon is fading fast

A Shanghai court has frozen the 16 billion yuan stake Jia owns in LeEco’s Shenzhen-listed Leshi Internet Information & Technology Corp.

PUBLISHED : Wednesday, 05 July, 2017, 8:01am
UPDATED : Thursday, 06 July, 2017, 9:32am

Chinese billionaire Jia Yueting, who once envisioned building an empire that would rival US tech giants Apple, Tesla and Amazon, is seeing it fall apart before his eyes.

The 44-year-old founder of internet media company LeEco has been forced to abort an ambitious overseas expansion, halt investments in new business ventures, fire a large number of employees to cut costs, and even sell properties and assets in exchange for cash.

Things went from bad to worse this week when the 16-billion yuan (US$2.3 billion) stake Jia owns and controls in LeEco’s Shenzhen-listed arm – Leshi Internet Information & Technology Corp – was frozen by a Shanghai court, the latest asset freeze action taken by creditors of the cash-strapped company.

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According to a statement from Leshi on Tuesday night, Jia’s 26.03 per cent holding was frozen on Monday as a result of an asset-preservation action triggered by a loan Jia took out to finance LeEco’s smartphone business. Taking Leshi’s last share price of 30.68 yuan when trading was halted in April, Jia’s stake is estimated to be worth almost 16 billion yuan.

The statement said the share freeze would not impact Leshi’s daily operations and management.

But industry insiders said the worst is yet to come for LeEco. Tuesday’s announcement came in the immediate wake of news that a Chinese court had ruled to freeze 1.24 billion yuan (US$183 million) worth of assets belonging to three of the group’s affiliates, Jia and his wife.

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The Shanghai branch of China Merchants Bank turned to the courts seeking asset preservation after a LeEco affiliate failed to pay due interest on loans despite the bank’s repeated requests, the lender said on Monday.

The bank said the risk exposure to LeEco and its relevant businesses are “under control” and that it is open to resolving the debt dispute through negotiation. But the move to apply for asset preservation may be copied by other banks, which could make cash-strapped LeEco’s financial situation even worse.

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“Based on the statement from China Merchants Bank, it referred to asset preservation to act on unpaid due debt,” said Zhu Xiaosu, a partner at Shanghai-based law firm Watson & Band. “Other creditors, or banks, might follow suit if they have the same issue.”

Starting out as a Netflix-like video streaming service, the Beijing-based LeEco positioned itself as an Apple slayer and Tesla challenger by making expensive forays into smartphones and television manufacturing, and electric car development.

LeEco’s management shake-up comes as investors grow impatient

Jia has been battling with a cash squeeze since he publicly admitted in November last year that the company’s financial troubles resulted from “expanding too fast”. Mainland tech news website 36kr reported that LeEco had 34.3 billion yuan in debt, excluding what it owes its suppliers, as of March 31. LeEco, however, said the amount was an overestimate.

The asset freeze court order, which took effect on June 29 and will last for three years until June 2020, is the latest action by LeEco creditors amid the company’s cash crunch.

“Hypothetically, the court could auction the assets under preservation as follow-up action if LeEco keeps refusing to fulfil its repayment obligations to the bank,” said Zhu.

Property preservation itself is a common legal action for precautionary purposes, but its impact on market sentiment remains an open question for now, he added.

LeEco admits failure to use funds rightly to turn around business

Hu Jiaming, a Shanghai-based analyst with Capital Securities, said the asset freeze is expected to trigger further “negative” impact on LeEco’s unlisted businesses as well as Shenzhen-listed Leshi.

“It doesn’t matter whether or not LeEco can repay its debt to banks. Given the current situation, if you were a bank, would you take the risk to lend more money to LeEco ?” said Hu, adding that the company will find it difficult to maintain its business operations without funding.

LeEco said in a statement on Tuesday that it is “closely communicating with many financial institutions including China Merchants Bank, hoping to quickly solve its debt problems”.

Jia admitted in Leshi’s shareholder meeting last week revealed that the company was having difficulty raising financing for further business development because it “mistakenly” used January’s 16.8 billion yuan strategic investment, mostly from real estate tycoon Sun Hongbin’s Sunac China, to repay bank debt.

“We should have used the money on business,” Jia told a room of less than 50 investors last Wednesday. He conceded that the unlisted part of LeEco “faces a worse cash crunch than when the crisis began” after paying off more than 10 billion yuan of debt, mostly to financial institutions.

Most of Sunac China’s investment was injected into LeEco’s listed business, which remains intact in the short term as its trading has been halted since April.

Shares of Hong Kong-listed Sunac dropped 4.98 per cent on Tuesday to HK$16.04.

Beijing-based United Credit Rating said in a research note issued late June that the LeEco businesses that Sunac invested in – online video, film production unit and smart TV arm – were operating “normally” at the moment, but could be impacted by the financial problem of the rest of LeEco’s businesses.

“The investment(in LeEco) can diversify Sunac China’s business. But given the size of the investment, it could also impact Sunac China’s future business,” said the report.

Additional reporting by Xie Yu

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