LeEco – Thin ice.
We think financial thin ice will force LeEco out of automotive.
LeEco has hit a major stumbling block meaning that something has to change to prevent what could become a disastrous unravelling of its financial structure.
We think that this will force it to refine its strategy resulting in the ending of its ambitions in automotive.
LeEco’s founder, Jia Yueting, has spent 6 years and something like $5bn in building a company that wants to be Apple, Amazon, Netflix and Tesla all rolled into one.
The problem is that only the Netflix-like business (mainland China video streaming) is profitable meaning that everything else, including a huge expansion into Silicon Valley, is burning cash.
This has been financed by a series of collateralised loans where Jia Yueting has pledged his shares in LeEco in exchange for cash which he has then lent to LeEco.
LeEco is listed as Leshi Internet Information & Technology Corporation in Shenzhen meaning that its share price is hostage to the fortunes of the regular market.
Consequently, if sentiment sours and the share price goes below a certain level, there will be margin calls on the loan which are very likely to result in the sale of shares to meet these commitments.
These sorts of situations often result in a death spiral where share sales to meet margin calls result in a lower share price and more margin calls and so on.
Leshi shares have not performed well at all this year with the shares down some 30% from where they were in June 2016 and at the end of 2015.
Given that the collateralised loans were struck towards the end of 2015, we suspect that the current share price is uncomfortably close to the kind of levels that would prompt these margin calls.
We think that this is why Jia Yueting has written to his employees admitting that the company is over stretched and warning them that the cash will be more carefully invested going forward.
LeEco has struck some big deals this year including $2bn to buy Vizio, $1.8bn to build a connected car factory in China as well as $250m to buy 40 acres of Silicon Valley real estate from Yahoo.
To add insult to injury LeEco has failed to hit fund raising targets for its Chinese limo hailing service Yidao Yongsche.
We suspect that this has everything to do with the merger of Didi and Uber in China creating one huge giant and few minnows.
Ride hailing is a winner takes all market, and Yidao is now a tiny minnow in the Chinese market meaning that its chances of success are now very small which looks to have been reflected in the lack of investor interest.
Taking all of LeEco’s operations into consideration, we think that if it jettisoned all of its automotive ambitions (Faraday Future, Chinese connected cars and Yidao), the company would be in a much better position to compete.
Its other assets such as media consumption, TVs, phones fit together much more effectively and there are well documented synergies to be had from owning both the hardware and the software in the ecosystem.
LeEco’s automotive ambitions have always looked like an annex to the core business and it is increasingly clear that they stand to be a huge drain on resources.
The Faraday Future plant in Nevada and the Chinese factory have not yet broken ground meaning that the automotive ambitions can be quietly mothballed without too much fuss.
We see Jia Yueting as having little alternative as LeEco is skating on financial thin ice and there is a death spiral of margin calls and forced share sales right underneath if it breaks.
Furthermore, with a clear strategy to differentiate its offering in USA on price, it is going to need every cent it has to finance its ambitions and grow its digital consumer ecosystem.
Hence, we suspect that the automotive ambitions will be reluctantly curtailed which we think gives LeEco its best chance of success in its other endeavours.
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