Caixin
Nov 14, 2016 06:52 PM
BUSINESS & TECH

Some Wonder Whether LeEco's Electric-Car Venture Is One Ambition Too Many

Jia Yueting, chairman and CEO of LeEco. Photo: IC
Jia Yueting, chairman and CEO of LeEco. Photo: IC

(Beijing) — Launched as a Netflix-like video-streaming enterprise, tech giant LeEco has much bigger dreams of expanding into the business territories of Apple, Amazon.com and even Tesla Motors. But investors wonder whether LeEco's ambition is running ahead of reality.

Rising concerns over a possible capital crunch amid LeEco's rapid expansion have sent shares of the company's publicly traded arm, Le.com, on a volatile ride over the past weeks, fueled by reports of delayed payments to suppliers. On Nov. 11, Le.com closed at 38.38 yuan ($5.63), slightly reviving after a 14% slump over the previous week. That was just above the 38-yuan point at which the company's financial structure may be threatened because a large percentage of its stock is pledged as collateral for loans, a security market analyst said.

In an interview with Caixin on Nov. 9, LeEco CEO Jia Yueting confirmed that payments to some suppliers of the company's smartphone business were postponed but said the company maintains sound relationships with major suppliers. Jia has put up more than three-quarters of his personal 35% stake in Le.com as collateral in dozens of rounds of financing, according to documents reviewed by Caixin.

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The 43-year-old billionaire entrepreneur told employees in a Nov. 6 internal email that the company is facing financial pressures largely because of its costly electric-car venture and will enter a new phase of more-conservative spending. Jia's email also acknowledged that LeEco has expanded more rapidly than it could raise adequate capital, restraining its future growth. In addition, Jia also noted that the company's management structure is lagging behind its expansion, leading to "big-company disease."

LeEco backers say Jia's ambitious plans amount to a visionary strategy for expanding the company's business footprint. But critics say Jia is burning cash on an improbable quest that may put investors at risk.

In a Nov. 8 statement, LeEco denied media reports that it delayed the construction of an auto factory in the U.S. state of Nevada due to unfulfilled contractor payments, and said the company's operations have remained normal. The company also said reports critical of its high-leverage growth model "failed to understand LeEco's business ecosystem."

In a Nov. 9 meeting with investors, Jia said LeEco will not change its business strategy as he is still confident in its growth path.

When asked by Caixin about why he decided to expose the company's capital crunch at this moment, Jia said, "It's normal to send an internal letter."

Less than a month ago, the company staged a splashy event in San Francisco to mark its foray into the U.S., unveiling cutting-edge gadgets such as phones, internet TVs and a smart bike.

Established in 2004, LeEco has branched out from video streaming into a broad array of software and devices. In December 2014, LeEco unveiled its surprise plan to build electric cars and compete with Elon Musk's Tesla Motors.

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The company's breakneck growth has made Jia one of China's wealthiest men. According to Forbes, his $4.1 billion fortune is the 37th-largest in China this year. In the past two years, he led LeEco into a series of huge investments, including the $2 billion purchase of Vizio Inc., a U.S. maker of flat-screen televisions, and a plan to build a $1 billion electric-car factory in Nevada.

But the question hanging over LeEco is how the company will finance all of that. Documents obtained by Caixin show that over the past few years, the company has raised more than 33 billion yuan from equity sales. Including personal investments from Jia, the company has generated a total of almost 50 billion yuan in capital injections over the past six years. But that falls short of the 75 billion yuan of investment plans disclosed by the company.

Expansive Ecosystem

LeEco has portrayed its business model as an ecosystem that links content and services to a wide range of smart devices such as TVs and smartphones. To many investors, the brightest element is the electric-car project.

LeEco's nascent car business has a partnership with Los Angeles-based Faraday Future, a venture with Aston Martin and a self-driving car project. Earlier this year, LeEco unveiled at the January Consumer Electronics Show in Las Vegas and the April auto show in Beijing two concept cars, both of them electric, self-driving models — the FFZero1 sports car and the LeSee Pro sedan.

The company said it could start production as early as next year at a new plant in Zhejiang province. But many analysts said they doubt LeEco can bring its cars to market that quickly. Auto manufacturing involves a long, complicated supply chain. Even established companies spend four to six years developing a new model. In addition, most forecasters say commercial production of self-driving cars won't begin before 2020.

Making a profit is another challenge. After 13 years in business, Tesla is still losing money. In the second quarter of this year, Tesla reported a loss of $21,000 on each car it produced.

The auto business is a main driver of LeEco's capital crunch. In his email to the staff, Jia said the auto project has cost more than 10 billion yuan, adding to pressure on the company's capital structure.

LeEco has shifted funds from other business segments including smartphones and sports content to support car development, several sources from LeEco told Caixin.

Sources close to LeEco's smartphone business said in early November that the company delayed payments to its suppliers for several months. Some media reports said LeEco is 10 billion yuan in arrears on payments to its suppliers. LeEco denied those reports on Nov. 8.

Shenzhen-based Sunwoda Electronic Co., a major battery supplier to LeEco phones, said a small number of payments from LeEco were extended, but the company continues to do business as usual with LeEco.

In 2013, LeEco launched its internet TV business to break through in a long battle with other video streaming sites, including Youku Tudou and iQiyi.com. Jia said at the meeting with investors that LeEco's TV sales are approaching 10 million units and he expected the internet TV business to turn profitable soon. Company financial reports showed that in the first half this year, LeEco's TV subsidiary recorded a loss of 56.9 million yuan, narrower than the loss of 730 million in 2015.

The backbone of LeEco's business is still content production for video streaming, mainly through its film and sports subsidiaries. As of April, the sports streaming service LeSports owned broadcast rights to 310 sports events worldwide, 72% of them exclusive, company document showed. Every year, LeSports livestreams more than 10,000 sporting events on its site, lesports.com.

In March, LeSports raised 8 billion yuan to buy more media rights and make investments in the sports business. But a LeSports staff member said only half of the funds stayed in the sports unit, while the rest funded other LeEco businesses. Jia said the sports unit was repaying funds that the parent had previously lent to it.

Some market analysts said they were concerned about hidden cash flows among subsidiaries of LeEco. They said inadequate corporate controls may restrain the company's growth in the future. A company executive who asked not to be named said that while the publicly traded arm of the company, Le.com, is under close regulatory supervision, the nearly one dozen unlisted LeEco subsidiaries are mainly under Jia's control.

"Jia decides what to do and what not to do," said a LeEco investor. "Shareholders have little say."

Thirst for Cash

In September, Jia announced the completion of a $1.08 billion round of financing for LeEco's auto unit from investors, including Shenzhen Capital Group Co., Legend Holdings and Minsheng Trust Co.

Caixin learned from related documents that LeEco's subsidiaries and business units, excluding Shenzhen-listed Le.com, have raised more than 23 billion yuan from venture capitalists and private equity funds.

Much of the equity that LeEco sold went to institutions that repackaged the units into smaller, more-affordable equity tranches for sale to retail investors, according to a venture capitalist in Shenzhen. Investment thresholds for some of LeEco's projects were about only 100 million yuan. Many market analysts have warned that the trend of retail investors buying into private equity and venture capital funds that invest in startups exposes the retail investors to risks they can't bear.

Most of LeEco's fundraising put up Jia's personal stake in Le.com as collateral. Company and market documents showed that as of September, Jia — who holds about 35% of Le.com — put up 83.7% of his stake as collateral. Between 2010, when Le.com was first listed, and October 2015, Jia used his holdings as collateral in 38 rounds of fundraising, the documents showed.

"It is not the traditional way of fundraising from VCs and PEs," said the Shenzhen venture capitalist. "It is more like a loan than an equity investment" because most of the investment vehicles set a buyback time and fixed yield rate.

Le.com has also been an important financing platform for LeEco. In the 2010 initial public offering, Le.com raised 730 million yuan. Less than four years later, the company raised 1.2 billion yuan in a private placement completed in May 2014. Another placement of 4.5 billion yuan was planned three months later but was postponed because of market volatility. The fundraising plan was revived in August this year and secured 4.8 billion yuan. Market information provider Wind Info said that since 2010, Le.com has also issued five batches of corporate bonds to raise 2.5 billion yuan.

Company financial reports showed that by the end of 2015, Le.com's liabilities reached 77.5% of its total assets, far higher than the average of 32.7% for listed internet companies. In 2015, Le.com reported 573 million yuan of net profit and nearly 17 billion yuan of total assets. But the company had just 2.8 billion yuan cash available by the end of last year.

Contact reporter Han Wei (weihan@caixin.com)

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