MEDIA: LeEco Tries Real Estate, Draws Regulatory Scrutiny

Bottom line: Questions about the valuation for its filmed entertainment unit and a new real estate acquisition reflect an increasingly ambitious LeEco, which could cause future problems if some of its decisions turn out to be flawed.

Stock exchange queries LeEco on film unit

Two new headlines are casting a spotlight on the increasingly diverse ambitions of online video giant LeEco (Shenzhen: 300104), led by reports that the company formerly known as LeTV is making a major move into real estate. At the same time, another report involving a potentially inflated valuation for the company’s filmed entertainment unit is casting a spotlight on the murky finances behind LeEco, spotlighting the kinds of financial shenanigans that often take place behind the scenes at many hot Chinese companies.

I’ve been saying for a while now that LeEco looks quite overvalued at its current stock price that gives it a market value of nearly $17 billion. Like many Chinese firms, LeEco mostly puts profitable assets into its publicly traded company and maintains its loss-making units as separate private entities, making it difficult to figure out whether the overall company is making or losing money.

We’ll begin with the news involving LeEco’s filmed entertainment unit, whose latest valuation is coming under scrutiny from the Shenzhen stock exchange, according to the influential Caixin website. (Chinese article) The listed LeEco recently acquired the unit, giving it a valuation of 9.8 billion yuan, or about $1.5 billion, at the time of the deal. The Caixin report points out that the 9.8 billion yuan valuation is sharply higher than the unit’s earlier value of 1.5 billion yuan in 2013.

The Shenzhen stock exchange’s queries and doubts appear to be based on its own calculations using company-supplied data. Here I have to admit that my own accounting skills aren’t very advanced and I don’t really understand the specifics of why Shenzhen stock officials are questioning the unit’s valuation.

But as someone who follows Chinese start-ups quite closely, I can offer my own observation that high valuations have become a recent obsession with many companies from the tech and media spaces. It often seems that such valuations have become more important than actual business these days, and local investors seem quite happy to play along with the game by bidding up stock prices and making private investments that translate into big valuations.

While some might argue that this is market economics at work, I would say that it looks quite speculative and artificial, and is often designed to attract even more money rather than put a true value on a company. Such fixation often leads to valuation bubbles, and also to strange strategic choices like the second set of new reports saying LeEco’s newest investment area is real estate.

Taste for Real Estate

Those reports say LeEco has just spent 3 billion yuan to buy a real estate company called Shanghai Shimao (Shanghai: 600823). (Chinese article) The purchase appears to be part of LeEco’s broader drive to create an ecosystem of products like smartphones, TVs and cars to deliver various information and other services. Thus under that logic, real estate services like the ones provided from Shimao would be part of that equation.

This particular investment isn’t huge, but reflects LeEco’s increasingly diverse ambitions as it ventures beyond its initial business of providing online video services. Its recent forays over the last 2 years include moves into the new energy car business, and also into smartphones, just to name a few. It is also reportedly in talks to purchase a large piece of land in California to build a new Silicon Valley international headquarters. (previous post)

I personally think that LeEco and its charismatic chief Jia Yueting have become slightly drunk on their own phenomenal growth over the last year, leading to this kind of aggressive valuations and unfocused strategic directions. The Shenzhen stock exchange’s request for information and this latest real estate acquisition seem to reflect that aggressive ambition, which could cause problems for the company later if some of its recent moves and assessments turn out to be flawed.

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