Sunac slumps as US$2.2b bet on China tech tycoon questioned

[HONG KONG] Sunac China Holdings Ltd. fell the most in more than 16 months in Hong Kong as investors questioned the real estate developer's US$2.2 billion bet on Chinese tech tycoon Jia Yueting's cash-strapped LeEco empire.

The stock slumped as much as 10 per cent, the biggest intraday decline since Aug 26, 2015, and traded 5.4 per cent lower at HK$6.90 as of 11:06am local time, paring this year's gain to 6 per cent.

The investment in three companies affiliated with LeEco marks Sunac's first foray beyond its mainstay property holdings. Chairman Sun Hongbin said in a briefing in Beijing that while he expects "very rapid" growth for Sunac and other leading developers as the real estate industry consolidates over the next five to 10 years, he's looking at other opportunities to propel growth beyond that period. Areas of interest include healthcare, finance and natural resources, he said.

"Overseas investors see this as relatively negative to Sunac," said David Yang, a Shanghai-based analyst at UOB Kayhian Investment Co. "The deal will certainly push up the company's net gearing, while it can hardly bring much profit contribution in the near term."

Sunac's net gearing may have climbed to 124 per cent as of Dec 31, after a "fairly aggressive" year for acquisitions strained its balance sheet, Mr Yang said. The LeEco deal may help push net gearing to 162 per cent by the end of this year, compared to an industry average of 89 per cent at the end of June, he said.

Tianjin-based Sunac was among China's most active real estate buyers last year, striking the largest number of deals and becoming the third-largest acquirer by total deal value, according to data compiled by Bloomberg. It's been involved in 13 deals totaling US$4.2 billion over the past 12 months. Most of its acquisitions involved its main business of real estate, including property assets from Legend Holdings Corp and a stake in Beijing Homelink Real Estate Brokerage Co.

"While we're firmly optimistic about the real estate industry for the next five to 10 years, we've since long ago started an exploration journey to prepare for 10 years later," Mr Sun told reporters in Beijing on Sunday, when announcing the LeEco deal.

The 15 billion yuan LeEco investment works out to close to a quarter of Sunac's cash balance of more than 60 billion yuan (S$12.4 billion) at the end of 2016, which was disclosed by Sunac at the press briefing.

That the investment lacks synergy with the developer's main business is shaping up to be another concern, said Toni Ho, an analyst at RHB Osk Securities Hong Kong Ltd.

Sunac on Friday said it will buy 8.6 per cent of Leshi Internet Information & Technology Corp, the video-streaming and TV giant, for about 6.04 billion yuan. It also agreed to buy 15 per cent of Le Vision Pictures for 1.05 billion yuan, and a 33 per cent stake in Leshi Zhixin, the TV unit, for 7.95 billion yuan, it said in a Hong Kong stock exchange filing.

Shenzhen-listed, Leshi Internet said in a separate filing it will also receive 1.83 billion yuan from other investors, bringing the total cash injection to more than 16.8 billion yuan.

LeEco is the holding group for a range of technology companies run or controlled by Mr Jia that market products from electric cars to smart TVs. In November, the entrepreneur admitted his group faced a cash crunch after launching too many products and expanding too quickly in past years. Mr Jia cut his own salary to 1 yuan and warned of hard days to come.

The investment in Mr Jia's technology companies is a departure for the Chinese developer. China's property market has become very risky as land prices have soared, Mr Sun said, adding that the company has refrained from buying any land in government auctions since October. Property sales in China may stagnate as growth becomes "very difficult," he said.

In a six-hour meeting a month ago between the two tycoons, Mr Sun said he was impressed by the "impeccable" business logic of the operation and Mr Jia's entrepreneurial spirit, while Mr Jia said the deal was "love at first sight".

Mr Sun said on Sunday that the deal was designed to completely solve the funding shortfall and improve LeEco's corporate governance structure. The company "lacked nothing but money," Mr Sun said.

In an interview with Bloomberg in May, Mr Sun said the firm would carefully manage cash flows while scouting for "many, many projects," adding that its cash position was secure. Sunac emerged as a high-profile acquirer in 2015 when it came close to buying troubled Kaisa Group Holdings Ltd, the first Chinese developer to default on offshore debt. Mr Sun later dropped the deal.

BLOOMBERG