Sunac's US$2b LeEco injection making investors nervous

Hong Kong

SUNAC China Holdings 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 6.2 per cent lower at HK$6.84 as of 1:37 pm 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 at a briefing in Beijing on Sunday 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 Kay Hian Investment. "The deal will certainly push up the company's net gearing, while it can hardly bring much profit contribution in the near term."

Even Mr Sun admitted that some of the people he consulted before making the investment in LeEco, whose interests range from electric cars and TVs to entertainment, were sceptical about the deal. "Everybody said it's worth looking," he told reporters in a packed auditorium in a five-star Beijing hotel on Sunday. "That's always followed by a 'but,' and what comes after is very different," he added, citing issues from LeEco's profitability to a lack of cash flow.

"I want to say, I've seriously considered their opinions," he said. "But I don't feel their opinions are enough to overthrow our decision."

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 totalling 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 and a stake in Beijing Homelink Real Estate Brokerage.

"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 said.

The 15 billion yuan (S$3.1 billion) LeEco investment works out to almost a quarter of Sunac's cash balance of more than 60 billion yuan at the end of 2016, which was disclosed by Sunac at the press briefing.

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, UOB's Mr Yang said.

The LeEco deal may help push net gearing to 162 per cent by the end of this year, compared with an industry average of 89 per cent at the end of June, he said.

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.

Sunac on Friday said it will buy 8.6 per cent of Leshi Internet Information & Technology, 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. He cut his own salary to 1 yuan and warned of hard days to come.

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," he said. BLOOMBERG