16.8 Billion Yuan Couldn't Stop the Stock Slide, and Now Jia Yueting Has Stepped Aside. What Moves Does LeEco Have Left?

There is no hope left in those businesses anyway.

LeEco no longer carries the Jia name.

After more than a month of suspended trading, LeTV announced in a filing yesterday afternoon that Jia Yueting had applied to resign as the company's general manager while staying on as chairman. Liang Jun, until now president of Leshi Zhixin, becomes general manager of LeTV.

Under LeTV's articles of association, the company runs on a general-manager responsibility system: one general manager answers to the board, runs day-to-day operations and management, and carries out the board's resolutions.

Jia Yueting is still the largest shareholder, but giving up the general manager's job already means giving up day-to-day control.

In a letter to all employees that followed, Jia Yueting announced that LeTV would have a full-time CEO for the first time, along with a wider management shake-up: chief financial officer Yang Lijie would hold no position at all, replaced by Zhang Wei, who had been running finance for LeEco Holdings' China operations.

In the letter, Jia Yueting wrote that the appointments of Liang Jun and Zhang Wei would be "an important milestone for LeTV since its 2010 IPO."

That Liang Jun would replace Jia Yueting had already been let slip early this month by Sun Hongbin, chairman of Sunac China, at Sunac's earnings briefing. Sunac bought into LeEco in January to put out the fire.

At that early-May briefing, Sun Hongbin said of LeSports: "The Chinese Super League cost 1.35 billion yuan last year and brought in 50 million in total — a loss of 1.3 billion. That's insane." Last week came reports that LeSports was cutting 70% of its staff and that three top executives had left.

Liang Jun, the man now replacing Jia Yueting, used to run the LeEco business Sun Hongbin cares about most: LeEco TV.

LeEco is being remade, step by step, to Sun Hongbin's design.

16.8 Billion Yuan Could Not Save LeTV's Share Price

LeEco's crisis began last November. From the day it was exposed for falling behind on payments to suppliers in its phone business through December 9 — 37 days — 10.8 billion yuan of market value evaporated. The report QDaily published at the end of last year has the details.

LeEco then suspended trading for forty days while it looked for a way out, and Sunac turned up with 15 billion yuan. Adding two smaller investors, LeEco raised 16.8 billion.

The money went to Jia Yueting and to LeEco's three relatively promising businesses: LeTV, Leshi Zhixin and Le Vision Pictures.

With the cash in hand, LeEco quickly resumed trading. After a few better days, the stock went back to falling.

In April, LeEco announced that part of the financing had arrived and the stock ticked up. Then the bad news resumed: the founder of LeEco's car business left; the founder of Yidao Yongche said publicly that LeEco had diverted 1.3 billion yuan of loans to build cars; an affiliated company fell behind on loan repayments. None of the new money, in other words, had fixed the operating problems underneath. Then came a weak annual report, and the stock slid all the way down again.

After the crash, LeEco went back into a long trading halt on April 14.

From taking the investment in January to the latest halt, LeTV's share price fell 13% and 8.6 billion yuan of market value disappeared. Nearly a third of the trading days in that stretch were spent suspended, to stop the fall.

In 2015, with LeTV trading at its 100-yuan high, Jia Yueting cashed out more than 6 billion yuan and lent it to the company interest-free, for a term of no less than five years. At the end of the first half of 2016, the loans to LeTV from Jia Yueting and his sister Jia Yuefang stood at 3.9 billion yuan.

By the time the 2016 annual report came out, the money Jia Yueting had lent LeTV was down to 2.6 million yuan. A five-year loan in name; one year in practice. LeEco's filings said that even if Jia Yueting and Jia Yuefang stopped lending the money to the company, it would go toward buying more shares. But LeTV never disclosed any follow-up purchase, and the stock kept falling. 6 billion yuan is not a small sum — more than a third of what Sunac paid for its stake in LeEco. Buying shares without telling anyone is not how a man shows the outside world he has confidence in his own stock.

Unlike a Normal Company, LeEco Cannot Afford a Falling Share Price

LeEco's businesses come in three blocks: the listed ones, the unlisted ones, and cars.

The listed block means LeTV, which went public on the A-share market in 2010, along with its TV and cloud services.

The unlisted block includes film, sports, phones, Yidao premium ride-hailing (70%-owned), finance and a string of other new ventures.

Jia Yueting is LeTV's largest shareholder. During 2014 and 2015, when the stock was doing well, he pledged shares of the listed company to third-party financial institutions 15 separate times in exchange for cash to put into new businesses.

The institutions do this to earn interest. To protect themselves against losses, they agree on a share price with Jia Yueting when the loan is made.

Once LeTV falls below that price, they have the right to sell the shares and get their money back.

According to the first-quarter report, Jia Yueting, his elder brother Jia Yuemin and his partner Liu Hong hold 30.94% of LeTV between them.

Jia Yueting holds the most: 512 million shares, 97% of them pledged. Jia Yuemin holds 43.94 million shares, 98.4% pledged. Liu Hong holds 61.23 million shares, 48.5% pledged. On top of that, the group parent, LeEco Holdings, holds more than ten million shares, all of them pledged.

If the slide cannot be stopped, 30% of LeTV could be bought out from under them, and LeEco's executives would lose actual control of the company.

The A-share market has seen this before. Last February, the chairman of Coship Electronics lost control of his company for exactly this reason.

If it came to that, Sunac would also have the chance to put in more money, buy the shares Jia Yueting pledged, and take actual control of the company. But that carries risks of its own — and other bidders might want in.

Sunac Prepared to Take Over All Along

Jia Yueting was not the star of the press conference that announced Sunac's investment in January.

In a two-hour event, he spoke for only 15 minutes, and he rarely used LeEco's signature phrase, "ecosystem chemical reaction"; he said "synergy" instead. Sun Hongbin spoke for nearly three times as long (a Q&A followed).

Jia Yueting said the money would solve LeEco's funding problems in one stroke. From that day, his grip on LeEco was already much weaker.

Sunac China limited how Jia Yueting and LeEco Holdings could obtain and spend the money, and wrote specific conditions into the investment contract, among them:

• LeTV's board would have five members, two of them nominated by Sunac China — 40% of the votes. Jia Yueting promised to vote for the proposal;
• LeTV's board would set up an investment decision committee and a management committee beneath it, with Sunac nominating one member to each. Jia Yueting promised to vote for the proposal;

• Sunac would nominate a finance manager to join LeTV;

• Leshi Zhixin's board would have three members, one of them nominated by Sunac China;

• Sunac China would nominate a finance manager to join Leshi Zhixin;
• A CEO post would be added, to improve corporate governance;
• Sunac would appoint one supervisor each to the manufacturing and sales companies at the core of LeEco's phone business; Sunac had not invested in phones. Read that as Sunac China worrying that Jia Yueting would move money out of the listed company and its subsidiaries and into other companies in the LeEco ecosystem.

Sunac also wanted LeTV, Leshi Zhixin and Le Vision Pictures to become its associate companies. It already holds more than a third of Leshi Zhixin, LeEco's unlisted hardware business, and proposals there need two-thirds of shareholders to pass. That means Sunac can veto proposals at a shareholders' meeting, and LeEco's affairs are no longer Jia Yueting's alone to decide.

One by one, these control conditions have been met.

In April, Liu Shuqing, a senior general manager at Sunac China's risk-control center, became a non-independent director of LeTV. Sun Hongbin has stressed that Liu Shuqing is not there in name only, but will "actually manage LeTV's affairs."

Sunac has also done what its earlier investment announcement said it would, sending three finance managers into LeTV and its affiliates. A CFO has been dropped into Leshi Zhixin, finance managers have been posted to Le Vision Pictures and LeTV, and the phone business has a supervisor appointed by Sunac China.

"Our finance people are all in place, and we have veto power on the listed company's board. Our first step will certainly be to sort out the listed company's governance structure — there is still enormous room to improve that structure," Sun Hongbin said at Sunac's May earnings briefing.

He also insisted: "LeEco has to have a CEO. It didn't before; now someone has to run it, and Liang Jun is running it."

Judging by the run of changes, of course, the person actually running it is still Sun Hongbin.

"On cars, I trust Old Jia will put a lot of energy into cars. And on the listed-company side there's still me — it will keep getting better," Sun Hongbin said at the briefing.

Liang Jun took over LeEco's TV business in 2012. TV is also the relatively healthy one among LeEco's many businesses today: at a launch event late last year, Liang announced a plan to break even this year and make substantial profits in the two years after that. Among LeEco's businesses, that is rare.

Sun Hongbin's LeEco: What Is the Way Out?

Whether they believed in Jia Yueting's "ecosystem chemical reaction," or believed he could keep passing the parcel and let them cash out before one giant bubble burst, the people who bought the stock were mostly buying Jia Yueting.

That is probably why he did not step down as general manager when the Sunac investment was announced, and does so only now, when it is clear that even 15 billion yuan cannot rescue the share price — handing over control of LeEco in a way that looks relatively dignified.

At yesterday afternoon's media briefing, Jia Yueting and Sunac's representative Liu Shuqing said again and again that there was no fight over control. Jia Yueting also said the listed company's "formal decision period" on the choice of CEO began last August or September — though LeEco's overhaul did pick up speed after Sun Hongbin bought in.

As last year's report said, if LeEco could not raise enough investment to solve its funding problem, it would have no choice but to give up businesses.

Now 16.8 billion yuan has failed to solve the problem, and what Sun Hongbin has begun saying is: sell businesses.

At the Sunac earnings briefing early this month, Sun Hongbin said: "I keep telling Old Jia: in future it's the listed company and cars. Cars — do with them what you like. As for the rest, sell what should be sold." On Yidao and sports, it was the same: "partner up fast, sell fast."

In yesterday's all-hands letter and briefing, Jia Yueting said LeEco would be divided into just two parts from now on — the listed-company system and cars — and that the unlisted businesses would either be folded into the listed company or handled through "other integration."

The point of folding businesses into the listed company is to hold up the share price. Which also means only businesses with a future are worth folding in. Everything else that burns cash will be disposed of.

In March, LeEco ended its cooperation with Russia's Far East Development Fund, and LeLive, the e-commerce platform for selling Russian food into China, was shelved with it.

In April, LeEco called off its $2 billion purchase of the American television maker Vizio, citing foreign-exchange controls.

Then the overseas expansion stopped too. Sales in the United States missed expectations in 2016, so LeEco is cutting more than a third of its American staff. The electric-car plant LeEco invested in abroad has announced that it will not build a new factory.

Then Yidao's entire founding team resigned, saying LeEco's diversion of investment money had caused the cash problems. Judging by the drivers now queuing up every day to grab a slice of a limited withdrawal quota, LeEco has stopped feeding the premium ride-hailing business it controls. Whenever Sun Hongbin brings up Yidao in public, it is: "We've been pushing too — partner up fast, sell fast."

LeSports, the business Sun Hongbin called "insane," is changing more drastically still: executives leaving, live match broadcasts cut off one after another. At its Series A round, LeSports was valued at 20.5 billion yuan. By Chinese New Year this year, half that. Now even Beijing Shougang, which had meant to invest, will not invest at the halved valuation.

The phone business looks like the next one to be abandoned. At the 200 yuan LeEco subsidized per handset last year, that business alone swallowed at least 3.4 billion yuan in subsidies. At yesterday's meeting, Jia Yueting admitted the phone business had gone into a state of "quasi-shock."

That leaves film and finance as the big unlisted businesses.

Le Vision Pictures lost 891 million yuan in 2014 and 102 million in 2015, measured as net profit attributable to shareholders of the parent company. LeEco no longer discusses the film business's 2016 numbers; only the investment report Sunac China published in January mentioned that Le Vision Pictures had missed its target of "520 million yuan in net profit excluding non-recurring items."

Finance is not an easy business either. Even JD.com, whose main business makes money, carved its finance arm out separately to make its accounts look better. Meituan, which moved into finance recently, deals directly with users and merchants — resources LeEco does not have. LeEco also holds few financial licenses: insurance and micro-lending, and that is all.

Cars burn money faster and pay back later.

Nothing in LeEco's unlisted businesses is healthy, and most of them are being cut back.

The only businesses in the company that look reasonably normal are the listed ones: the video site and TV.

Buying rights or making its own shows, a video site sits in a market where everyone is burning cash. Baidu, Tencent and Alibaba, the three giants, are holding up China's three largest video sites whatever the cost.

LeTV's profits used to come partly from hardware subsidies — buy a LeEco membership and get a phone, a TV, Yidao credit and so on. The unlisted businesses' losses were converted into LeTV's profits.

With those businesses in decline, LeSports losing its broadcast rights, and users reading bad news about LeEco day after day, can it still sell memberships the way it used to?

As for the TV business: TCL's entire market value is only 42.8 billion yuan, and LeEco TV is far smaller.

Sun Hongbin may also have his eye on LeEco's land. Sun Hongbin has said that LeEco previously won government approval for 10,000 mu of land in the Moganshan area, and that once industrial and other projects are set aside, the remaining land is still worth a great deal to develop.

Starting from a video site, Jia Yueting used storytelling and pledged shares to charge into film and television production, television sets, sports, phones, cloud computing, liquor, ride-hailing, car-making and other markets, and made LeEco, for a while, a company worth 100 billion yuan.

Today those businesses are going over one after another, like dominoes.

There is no hope left in LeEco's businesses. As for its stock, it remains to be seen how many hard-to-read A-share retail investors will believe they are sharper than everyone else and can make a quick profit riding the "bottoming-out rebound" Jia Yueting mentioned yesterday.

Cover image from LeEco's US launch event, Visual Hunt, Baidu Baike