INTERNET: Crisis Grows for LeEco’s Coolpad, Yidao

Bottom line: Ongoing crises being faced by LeEco-backed Yidao and Coolpad are likely to deepen in the month ahead, as each company gets abandoned by its major stakeholder and is forced to grapple with rapidly deteriorating business.

Coolpad releases preliminary 2016 results

Two companies snapped up by former online video superstar LeEco (Shenzhen: 300104) are in the crisis headlines this morning, with smartphone maker Coolpad (HKEx: 2369) and car services operator Yidao both driving rapidly towards financial collapse. The first headline has Coolpad announcing preliminary results for 2016 that look quite alarming, as an ongoing back-and-forth with its auditor adds more worries to its story.

The second story has Yidao promising its increasingly unhappy unpaid drivers they will finally get their money late this month, as it tells the world it’s in the process of raising new funds. And if you believe that one, I have a nice bridge to sell you in Brooklyn.

But all sarcasm aside, both of these companies’ slides are at least partly — if not completely — related to the rapid downfall of LeEco, which itself is massively laying off employees in its own struggle for survival. Both companies were in tough spots due to fierce competition, and thought they were getting a rich sugar daddy at one point when LeEco became their major investor.

But LeEco’s own woes have basically left both companies to fend for themselves, which neither is doing too well. Adding to Coolpad’s problems is the fact the company was hoping LeEco would become a major customer for its smartphones, back in the heady days when LeEco wanted to build an ecosystem of interconnected devices and entertainment services.

That clearly isn’t happening these days, as Coolpad’s newly released preliminary 2016 financial results show its  revenue plunged by nearly half last year to about HK$8 billion ($1 billion). (company announcement) At the same time, the company plunged into the red to the tune of a HK$4.2 billion loss for the year.

Coolpad released the preliminary figures because a dispute with its auditor prevented it from filing the final results on schedule in accordance with stock exchange rules. For that reason its shares have been suspended since April 3, and Coolpad hasn’t given any indication of when trading will resume. It’s quite possible that when the dispute is finally resolved we could see some more negative news come out, since it’s quite likely the auditor isn’t comfortable with some of Coolpad’s past accounting practices and that’s why it’s requesting more information before signing off on the report.

Sit-in Continues at Yidao

Next there’s Yidao, whose drivers have been keeping a vigil outside the company’s headquarters in Beijing these last few weeks over unpaid wages. Previous reports have said Yidao promised the drivers they will get paid, and now the latest reports say Yidao has finally put forth June 29 as the date when drivers can start withdrawing money from their company accounts again. (Chinese article)

Yidao is also saying it’s in the process of raising more cash. There’s really not too much more to say about this latest development, except that the idea that anyone would give Yidao new cash at this point seems almost laughable. The company already operates in a highly competitive space, and anyone foolish enough to give the company money is almost certain to lose that investment.

But this is China, and just last week LeEco was telling the world its equally struggling sports division was also in the process of raising new cash. Perhaps LeEco still has one or two favors it can call in like that, but I doubt the same is true for Yidao.

Accordingly, we’ll have to watch what happens over the next month as the June 29 date draws near and Yidao’s drivers continue their sit-in outside the company’s offices. My guess is that many of the drivers may quit before then, and that Yidao’s suppliers will probably grow tired of waiting too, and the new funding will fail to materialize. That means there may not be much of a company left by the time the June 29 date arrives.

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