China’s version of Nasdaq under pressure as LeEco financial crisis spills over to listed arm

With a 3.41 per cent weighting on the ChiNext Index, a Leshi stock plunge after trading resumes could drag the whole market down

PUBLISHED : Wednesday, 05 July, 2017, 9:04pm
UPDATED : Wednesday, 05 July, 2017, 10:39pm

The unfolding financial crisis at China’s tech giant LeEco, which once saw itself as a potential rival to US peers including Tesla and Apple, is weighing on the country’s 5 trillion yuan (US$735 billion) ChiNext board – a Chinese version of the US Nasdaq, say analysts.

LeEco’s troubles are spilling over to its Shenzhen listed arm Leshi Internet Information and Technology Corp, as 26.03 per cent of the listed company’s stock, worth around 16 billion yuan, has been frozen by a Shanghai court, Leshi said in a filing to the Shenzhen bourse on Tuesday night.

Trading in Leshi shares has been suspended since April 17 when the company announced plans for a restructuring. According to the latest rules issued by China’s securities regulator in mid May, trading suspensions of listed companies should be for no more than three months if such a suspension was made in relation to asset restructuring.

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That makes the trading resumption of Leshi “one of the biggest risk hanging over the ChiNext board now,” said Yin Jun, who runs a private hedge fund in Shanghai.

“The company used to be a bellwether for trading on ChiNext. Even though investors are growing aware of the risks related to Leshi, we are concerned that once trading is resumed, the company will face a stock price crash, which would drag down the index,” he said.

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Yin said investors were “holding back from buying into ChiNext now” as many expect a correction in Leshi’s stock will cause a correction in ChiNext – a market that currently has the highest valuation and turnover in mainland China.

Leshi is the second biggest constituent of ChiNext, accounting for 3.41 per cent of the index weight.

The ChiNext board, with a market value of 5.05 trillion yuan by Tuesday’s close, was designed to host listings of China’s “new economy” firms, including those in the tech, media, and bio medicine sectors.

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The price-earnings ratio of ChiNext listed companies stood at 50.7 on average by Tuesday’s close, compared to 110.3 for Leshi, data from the Shenzhen bourse showed.

Ray Zhao, a tech analyst with a Shenzhen based brokerage company, said the trading resumption of Leshi “could trigger systemic risks”.

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Excluding payables to its suppliers, LeEco had 34.3 billion yuan (US$5 billion) worth of debt at the end of March, according to China tech news website 36kr. Only a small part of the debt was in bank loans, with most of it borrowed through stock pledged loans, convertible bonds, and leasing financing, according to 36kr.

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LeEco earlier said the debt figure from 35kr was an over estimate, but at a shareholder’s meeting last month company founder Jia Yueting admitted that the group’s cash problem was “more severe than expected” after a cash injection failed to turn around the business.

In January, Sunac China Holdings, a real estate developer had agreed to inject 15 billion yuan into the listed Leshi, after Jia publicly announced his group was in cash crunch in November.