January 24, 2018 / 7:57 AM / a month ago

Breakingviews - Perfect storm blows ill winds across Chinese tech

By Robyn Mak

HONG KONG (Reuters Breakingviews) - Leshi’s perfect storm is blowing ill winds across the Chinese tech industry. Hubris, margin loans and starry-eyed investors have led to a cash crunch at the $9 billion video-streaming and smart-TV business of embattled LeEco. The company is now chasing founder Jia Yueting, branded “China’s Steve Jobs,” for money he owes it. Bad behaviours that converged here will turn up elsewhere in due course.

After being halted since April 2017, shares of Shenzhen-listed Leshi Internet Information and Technology began trading again on Wednesday. They promptly plunged 10 percent, the maximum allowed. The 13.8 yuan price almost certainly has further to fall. Several funds already have cut their valuations to less than 4 yuan per share, Reuters reported. That’s a discount of more than 90 percent from the stock’s peak less than three years ago.

It’s a stunning corporate downfall ready-made for a Harvard Business School case study. Capitalizing on the success of the streaming service, Jia borrowed against his Leshi stake to help fund an expansion of LeEco. The conglomerate moved into smartphones, electric vehicles and movie production, prompting the swashbuckling entrepreneur to tout LeEco as China’s answer to Apple, Tesla and Netflix at once. Even as financial cracks began to show last year, property developer Sunac China ploughed $2.2 billion into Leshi and two other LeEco units.

Jia and his companies owe Leshi some 7.5 billion yuan, or about $1.2 billion, the company says. It is seeking his stakes in his electric-car ventures. Most of Jia’s 26 percent holding in Leshi has been pledged as collateral, which could lead to more assets being frozen and a transfer of ownership. What’s more, Leshi’s main businesses are suffering to the extent a net loss is expected for 2017 as management warns of “operational difficulty” if it can’t find funds to repay its debt.

The combination of troubles at Leshi may be unique. At the same time, tech companies are no stranger to cult-like founders, grand ambitions and eye-popping valuations. In China, investors are salivating over unicorns such as smartphone maker Xiaomi, bike-sharing startup Mobike and news app Toutiao. The situation at Leshi is a good reminder to keep a diligent watch for any signs of strain.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.

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