Date
6 December 2016
Leshi founder has acknowledged that his group was too hasty in rushing into an array of businesses. Photo: Reuters
Leshi founder has acknowledged that his group was too hasty in rushing into an array of businesses. Photo: Reuters

Leshi founder admits to cash crunch after unbridled expansion

Leshi Internet Information & Technology Corp. (300104.CN), an entity belonging to China’s LeEco group, had an amazing ride on the stock market not too long ago.

The Shenzhen-listed firm, which operates LeEco’s online video streaming website, saw its shares surge nearly ten-fold within six months last year, taking its market value to 200 billion yuan.

At its peak, the stock enjoyed a P/E multiple of more than 500.

The success came after the parent company raised billions of yuan to expand the group’s business worldwide.

But now, LeEco’s billionaire chairman and founder has admitted that the expansion, which took the firm into an array of businesses including sports media, smartphones, TVs and automobiles, has been too fast and that it has created problems. 

In a lengthy letter to employees, Jia Yueting apologized to shareholders and admitted that his technology empire is running out of cash to sustain the aggressive expansion.

He said the group will slow its madcap pace of expansion as funding has now become difficult.

Jia founded Leshi Internet Information & Technology in 2004, making it one of the first companies in China to stream TV shows and movies to paying subscribers. It has since then built up huge strength in terms of both content and users.

Leshi was listed in 2010 on Shenzhen’s ChiNext Board, raising 730 million yuan and giving it a market cap of 2.9 billion yuan.

Encouraged by the progress of the video-streaming operation, it rushed into smartphones, TVs and set-top boxes. All the new businesses moved on track.

In 2014, Leshi led the winners on the ChiNext board, with the stock hitting the 25 yuan mark. The market cap soared to 30 billion yuan, up nearly five times from the level in early 2013, and over 10 times the level at the time of the IPO.

The group then became too ambitious and launched aggressive overseas forays. Among other initiatives, it expanded into the Hong Kong market and paid HK$4.7 billion for broadcasting English Premier League football matches.

Elsewhere, it tried to get an electric car-making venture, Faraday Future, off the ground in the US.

But of the group’s various units, Leshi was the only profitable entity. The listed unit had sales revenue of 6.8 billion yuan in 2014 and a net profit of 360 million yuan.

Jia has been called a Chinese Steve Jobs as he is good at painting a rosy picture for his group and laying out grand visions.

He has big ambition to create an ecosystem for different devices, covering internet, media, online shopping, new energy, virtual reality (VR) and artificial intelligence (AI).

The Chinese tycoon has vowed to make his group a strong competitor to the likes of Amazon and Google.

The fancy visions sent Leshi’s share price soaring and its market cap hitting the 200 billion yuan level last year.

To finance his growing empire, Jia engaged in several deals and share issuances to raise huge amount of capital.

However, that strategy has proved to be short-lived.

Leshi’s stock plummeted by half during the stock market collapse in China last year. Jia was forced to sell his Leshi shares for over 10 billion yuan and lend the money to the company to keep it going.

The tycoon’s stake in Leshi has dropped to 30 percent from nearly 50 percent previously.

Things have become even worse this year. Leshi’s market cap has further slid to around 70 billion yuan, just a third of its peak level.

Jia has now outlined three key issues facing his empire.

First, the company has spread too fast and over-extended itself as it pursued a globalization strategy.

Second, “our fundraising ability isn’t strong,” Jia wrote in the letter to shareholders. “The scale of our external fundraising had trouble satisfying the demands of our rapid expansion.”

Third, Jia admitted his group could have been managed better.

“We hired over 5,000 employees this year, a pace that has never been seen in the industry. We were too preoccupied with expansion, without spending sufficient time to sort out our organizational structure and training new employees.”

Pledging to make amends and cut costs, Jia said he will now take a token annual salary of one yuan. He has vowed to pull back from rapid expansion and transition to a more manageable growth pace.

It remains to be seen how successful he will be in reviving the group’s fortunes. 

This article appeared in the Hong Kong Economic Journal on Nov. 9.

Translation by Julie Zhu

[Chinese version中文版]

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JZ/JP/RC

Hong Kong Economic Journal columnist

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