SMARTPHONES: Coolpad Losses Balloon, No Help in Sight

Bottom line: Money-losing Coolpad is likely to get sold before the end of this year to raise cash for controlling stakeholder LeEco, or could end up getting shut down if no buyer comes forward.

Coolpad to post big H1 loss

It’s a new week, and that means new chances to write about the struggles of companies in the orbit of fast-fading former video superstar LeEco (Shenzhen: 300104). Last week the company’s majority owned Yidao private car services was in the headlines, amid a he-said-she-said spat over 1.3 billion yuan ($189 million) in funds that Yidao said were “misappropriated” by its parent, leading to its own cash crunch that saw many of its drivers going unpaid.

If that wasn’t bad enough, now another one of LeEco’s assets, smartphone maker Coolpad (HKEx: 2369) is warning of ballooning losses due to plummeting sales in the fiercely competitive market. There are two subtexts here, the most obvious being that LeEco is hardly in any position to throw Coolpad a needed lifeline. The other is that LeEco’s own smartphone business is probably dying a rapid death, since it was theoretically going to use Coolpad to make at least some of its phones.

We’ll return to the bigger picture shortly, but first let’s zoom in on the latest headlines that have Coolpad issuing a warning saying it posted an operating loss of HK$460 million ($59 million) in the first quarter of the year, and expects to lose HK$600-HK$800 million in the first half. (company announcement) It astutely points out that the first-half loss represents a “significant decline” from last year’s first-half operating loss of HK$163 million.

What’s more, the company says it expects its sales to plunge by more than 50 percent in the first half of the year, citing stiff competition and also its own lack of new models. Coolpad says it continues to invest in product development, which is further pressuring its bottom line. But at the same time it doesn’t give any word about when some if its new models that could help to stabilize its sales might hit the market.

Coolpad has yet to publish its annual results, despite a stock exchange rule that says it should have done so by the end of March. It issued a statement blaming the delay on ongoing discussions with its auditor, implying there’s probably some disagreement about how past or perhaps present accounting issues were handled. (company announcement)

Anyone trying to read between the lines can probably guess the auditor is uncomfortable with some of Coolpad’s past and present accounting practices, and perhaps this latest profit warning indicates the two sides have reached some resolution on that matter. If that’s the case, perhaps we’ll see the company soon release its year-end results.

Changing Landscape

Returning to the present, the company certainly doesn’t seem to be in a very good situation. LeEco’s purchase of a controlling stake in Coolpad last year looked like a godsend at that time, since Coolpad was struggling due to stiff competition and also from a dispute over a previous joint venture with software security specialist Qihoo 360. The LeEco at that time was a far different creature from today, riding high on a wave of strong investor sentiment as the company delved into a wide array of new business areas.

Of course much has changed since then, most notably the sudden and rapid fall from grace of LeEco. That’s hugely important to Coolpad, which was dependent on its controlling stakeholder for both cash and also future business, since LeEco had big plans for entering the smartphone space. But the smartphone business isn’t going anywhere fast these days, and LeEco only recently settled a dispute with one of its main smartphone manufacturing partners, Compal (Taipei: 2334), by offering shares of itself to the Taiwanese company after failing to pay its bills.

All of this brings us to the current situation, which has China’s smartphone market in intense need of a consolidation due to rampant competition that has plagued the sector over the last 2 years. I’ve previously said that Coolpad looks like one of the companies that needs to be consolidated, either through a sale to another healthier company or perhaps even a shutdown. LeEco is in no position to provide a rescue at this point, and I do expect the next step will either be a sale of Coolpad to someone else or perhaps even a shutdown of the company.



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