LeTV (Shenzhen: 300104) could become the first major victim of a rapid downturn sweeping through the online video sector, with speculation running rife about reasons behind a prolonged trip abroad by the company’s chairman and CEO. The growing speculation that Jia Yueting may be wanted for some kind of wrongdoing prompted LeTV to start the new week by halting trading in shares of its Shenzhen-listed stock, following a slide of more than 10 percent over the last 2 weeks.
LeTV’s stock decline is even more dramatic since the beginning of the year, with the company’s shares down nearly 40 percent from a peak in March when the world was still quite bullish about Chinese online video companies. Much has changed since then, as China’s regulator launched a crackdown on the sector starting this spring. That drive widened steadily over the summer months and has shown no sign of slowing.
It’s still quite unclear if Jia’s prolonged absence from China is related to the crackdown, which began as a clean-up of pornography on online video sites and has gradually grown to include strict limits on the importation of foreign movies and TV shows. Most recently, most online video sites, including LeTV, have been forced to withdraw their TV set-top box products from the market. Such products allowed the online sites to compete directly with traditional TV stations, which raised big protests as a result.
As the markets reopened this week, LeTV issued an announcement saying trading of its shares have been suspended pending disclosure of a “major matter”. (company announcement) There’s no additional detail in the announcement, but the attention has rapidly moved to LeTV’s young and charismatic chairman and CEO Jia Yueting and his prolonged absence from China lately.
The reports say Jia has been outside of China since June. They suggest he originally left in connection with LeTV’s July announcement that it would set up a US subsidiary with offices in Los Angeles and Silicon Valley, as part of its drive to develop new online video technologies and products. (Chinese article) The high-flying company — one of the first to recognize the potential of China’s online video market — also announced earlier this month it would set up a $200 million fund to invest in the production of new TV shows and movies, following a broader trend by Chinese new media companies.
From an observer’s perspective, I could certainly understand why 2 such major initiatives would occupy much of Jia’s time and require him to spend 4 months outside the country to ensure that everything was running smoothly. But the latest rumors, combined with suspension of the company’s stock, suggest that perhaps his absence is linked to concerns about his status in China.
The most obvious concern would be that Jia may be the subject of a criminal probe. As LeTV’s largest shareholder with nearly a third of the company’s stock, he could be suspected of insider trading or another crime related to LeTV shares. But things could become more ominous if Jia is accused of other criminal activity related to the ongoing industry crackdown.
Unless Jia suddenly reappears in China and says his prolonged trip abroad was just business as usual, it seems almost inevitable that LeTV’s stock will tumble once trading resumes. But the much bigger question is whether shares of other video sharing sites like sector leader Youku Tudou (NYSE: YOKU) might also stumble amid concerns about an acceleration of the crackdown. My instinct is that these larger companies are probably safe for now, as most are headed by older, more experienced executives than Jia. Still, the looming tumble of LeTV certainly doesn’t bode well for the already-suffering sector, and I suspect we’ll continue to see more fall-out in the months ahead.
Bottom line: LeTV’s shares are likely to tumble when trading resumes over concerns about a criminal probe against its chairman, in the latest ominous signal as Beijing cracks down on the online video sector.