Date
23 June 2017
Leshi’s new structure could prevent founder Jia Yueting from channeling money out of the listed unit to his other fancy projects, such as building smart cars. Photo: Reuters
Leshi’s new structure could prevent founder Jia Yueting from channeling money out of the listed unit to his other fancy projects, such as building smart cars. Photo: Reuters

Why Leshi reshuffle is a show for investors

Jia Yueting, founder of the Chinese conglomerate LeEco, will step down as chief executive of the Beijing-based unit Leshi Internet Information & Technology Corp. (300104.CN) but will stay on as chairman.

The reshuffle is widely seen as Jia ceding control of Leshi to the second largest shareholder Sunac China Holdings Ltd. (01918.HK).

In my opinion, such an interpretation is not entirely correct.

True, Jia’s control over the company could be weakened in the future. Under the new management structure, Sunac has appointed its own financial manager for each major subsidiary of Leshi, effectively keeping a close watch on the books and preventing Jia from directing funds from the listed unit to unlisted business, such as the group’s money-burning automotive unit.

Sunac invested in Leshi largely because of its confidence in the latter’s Netflix-like video streaming service and smart TV, not the myriad of cash-guzzling businesses that belong to the unlisted side of the LeEco group.

Though Sunac’s boss Sun Hongbin admires Jia as an innovative and charismatic entrepreneur, he is most concerned about Jia’s freewheeling and overly ambitious side.

Jia has proven to be poor in cashflow management skills, a fatal weakness that nearly dragged the company into a cash crunch.

Sun apparently wants to install a mechanism to cut the links between the listed and unlisted units in case the unlisted unit collapses.

Yet, Jia is still running the show. One needs only to take a look at the background of the newly appointed chief executive Liang Jun and chief financial officer Zhang Wei.

Liang Jun joined Leshi in 2012. He was later appointed to vice president and general manager of the company’s TV business.

Zhang Wei is the executive director of Coolpad Group (002369.HK), of which Jia is the chairman.

In other words, both are close aides of Jia. That means Jia still holds great control over Leshi even after stepping down as CEO.

Sun only owns less than 9 percent of Leshi, compared with Jia’s 25.67 percent. Also, Sun is a property man; he has no idea how to run an internet firm.

The new arrangement can also be regarded as a show to convince investors that Leshi is a changed company.

Worried about the group’s liquidity situation, investors had dumped Leshi shares, which plunged nearly 50 percent over the past 12 months before trading was suspended.

Since most of Jia’s shares have been used as collateral for obtaining loans, the falling share prices created additional uncertainty and the danger of triggering a domino effect.

Management changes can send out a signal to the market that Leshi won’t be overly expanding and spending beyond its means from now on. Also, someone would be guarding the firm’s cash carefully.

This article appeared in the Hong Kong Economic Journal on May 24

Translation by Julie Zhu

[Chinese version 中文版]

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RT/CG

Hong Kong Economic Journal columnist

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