Hong Kong-listed Truly International Holdings (00732.HK) said Tuesday its subsidiary has agreed to invest 720 million yuan (US$104.9 million) in Leshi Zhixin, a smart TV unit of Shenzhen-listed Leshi Internet.
It’s mind boggling how Leshi founder Jia Yaoting can keep pulling rabbits out of a hat.
Over past few months, Jia managed to raise money first from his classmates then from Sunac China (01918.HK). This time, it is from one of his suppliers.
On closer look, the deal appears to be different from a straightforward investment. It looks more like a debt-to-equity swap in an indirect fashion.
Truly International supplies mobile phone parts to Leshi, which is involved in numerous businesses including video streaming, smart phones and smartTV.
Running out of cash, Leshi reportedly owes its suppliers more than 10 billion yuan and is behind in payments. Truly is one of the creditors, with receivables of 1 billion yuan.
It appears that Leshi has been negotiating with its suppliers since last year, and has been trying to convince them to swap some of the debt into equity.
Some rejected flatly. Taiwan’s WPG Holdings, for instance, chose to make provisions first and keep chasing Leshi for the money back.
Truly, however, decided to take the offer.
Truly, which produces LCD displays, camera lenses and phone cases, is a small player with a market cap of HK$10.6 billion. Leshi is one of its biggest clients.
It is said that Truly invested more than 4 billion yuan last year to build a massive factory in Shanwei, Guangdong province. The new factory will start operations in August and LeEco is one of the main customers of the new facility.
To put it simply, Truly has too much to lose if Leshi goes bankrupt.
In the transaction, Truly Electronics Manufacturing, a subsidiary of Truly International, would pay 720 million yuan for a 2.3 percent stake in Leshi Zhixin.
Truly is making the investment because it is “ optimistic about the investment opportunities” from technological innovation and high-tech goods such as smart television.
The two groups will also enhance strategic cooperation in the electronic field.
But from another perspective, Truly could be forced to invest in Leshi’s smart TV unit because of its difficulties in collecting unpaid invoices from Leshi.
Leshi units are tightly knit, so if one goes down, the whole group could fall apart.
The investment will cost Truly about one year of earnings. Leshi’s smart TV unit booked a 730 million yuan loss in 2015.
This article appeared in the Hong Kong Economic Journal on Feb. 16
Translation by Julie Zhu
[Chinese version 中文版]
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