China property

Sunac China shares plunge on LeEco’s worsening crisis

The share price decline in the past four days has wiped off more than HK$8 billion in market value

PUBLISHED : Friday, 07 July, 2017, 9:39pm
UPDATED : Friday, 07 July, 2017, 9:40pm

Shares of Sunac China slumped in Hong Kong on Friday as investors fear that the developer could suffer a big loss from its 15 billion yuan (US$2.2 billion) bet on the cash-strapped LeEco Group, and would be forced to take over operations of the group’s core business.

Sunac shares plummeted 7 per cent to close at HK$14.80 on Friday. The stock has dropped 12 per cent in the past four trading days, wiping off more than HK$8 billion in market value for the country’s seventh largest developer by sales.

“Sun [Hongbin, chairman of Sunac] has underestimated the problems in LeEco,” said Chu Tongxin, a property analyst at Shenzhen Anji Asset Management.

Sun [Hongbin] has underestimated the problems in LeEco
Chu Tongxin, Shenzhen Anji Asset Management

The developer made a “strategic investment” in three LeEco affiliates in January, even after the tech group revealed a cash crunch in November last year. Shenzhen-listed Leshi Internet Information &Technology Corp is the core business of the group.

On Thursday night, LeEco founder Jia Yueting suddenly announced that he was stepping down as Leshi’s chairman and exiting the board, amid mounting debt problems.

Sunac’s chairman Sun Hongbin, was proposed as one of Leshi’s three new directors, the tech group said in a statement.

LeEco chief steps down from troubled unit to focus on auto dream

A Shanghai court this week freezed the 16-billion yuan 26-per cent stake that Jia owns in Leshi, as a local bank sought for asset preservation after LeEco failed to pay interest on its loans.

Nearly 20 suppliers also gathered at the gate of LeEco’s Beijing office demanding for payment of money owed, reported Chinese newspaper National Business Daily on Wednesday.

Jia admitted last month that the group has not used the funds it had rightly to turn around the business, and the situation was more dire than expected.

“Fifteen billion yuan is not a small amount. Investors are increasingly negative about Sunac’s deal as LeEco’s operations are worsening, and there’s a big question mark if its business could be sustained. It would be pretty bad for Sunac if LeEco collapsed,” said Raymond Cheng, a property analyst at CIMB Securities.

It would be pretty bad for Sunac if LeEco collapsed
Raymond Cheng, CIMB Securities

Analysts said as Sunac’s margin ratio was not high, a possible loss of 15 billion yuan was as good as wiping out several years of its earnings.

Last year, the developer reported a 25 per cent drop in net profit to 2.48 billion yuan.

The investment in LeEco is the acquisitive Chinese property firm’s first foray beyond its core real estate development business.

LeEco’s cash problems solved ‘once and for all’ says chairman, in wake of 15bn Sunac deal

Although Sun is known for his strong execution ability in China’s real estate industry, Chu said managing a tech company was not within Sun’s expertise.

Sunac declined to comment on the company’s future plan on LeEco.

In January , when Sun and his company became the second-largest shareholder in LeEco, Sun said the investment was driven by his admiration for Jia’s unique entrepreneurial spirit.

“I have consulted with many business associates before the deal. Many tried to dissuade me. But their arguments were not strong enough to change my mind. I don’t think they know LeEco very well,” he said at the time.

The biggest worry for Sunac was long-term investors’ disappointment with the company, as Sun had used shareholders’ money to invest in unrelated businesses, and they all know how serious the issue had become, CIMB Securities’ Cheng said.