April 7, 2017 / 8:27 AM / 3 months ago

China's Netflix-to-Tesla still awes investors

3 Min Read

FILE PHOTO: LeEco's new Le Pro3 phone is on display during a press event in San Francisco, California, U.S. October 19, 2016. RETUERS/Beck Diefenbach

HONG KONG (Reuters Breakingviews) - Chinese entrepreneur Jia Yueting is defying gravity. A stalled $2 billion deal would add to a growing list of setbacks at LeEco, his empire that sprawls from video-streaming to smartphones and electric cars. But shares of Jia's flagship listed unit still trade at a huge premium to established giants like Alibaba and Tencent. The gulf between hype and reality is widening.

Stricter controls on capital outflows have stalled LeEco's purchase of U.S television-maker Vizio, Caixin magazine reported last week. LeEco will only say the deal, announced in July, is still pending regulatory approval. If this deal fails, that would be Jia's highest-profile setback. In November he admitted LeEco had expanded too fast and faced a cash shortage. Since then some key executives have reportedly departed. And a LeEco subsidiary lost the rights to broadcast some Asian soccer matches after missing a payment.

Jia is trying to steer back on course. LeEco slashed its workforce in India by almost 80 percent, and is trying to sell a Silicon Valley property soon after buying it from Yahoo, Reuters reported in March. The company just secured $2.2 billion from a local developer for its internet TV and movie-production units.

Most of the LeEco empire is privately held, except Shenzhen-listed Leshi Internet , a $9.5 billion, Netflix-like business. Shareholders who bought into Leshi a year ago would be sitting on a negative return of over 40 percent. Contrast that with an old-school manufacturer like China's biggest traditional carmaker, SAIC Motor, which has returned 36 percent to shareholders.

Yet investors still back Jia to succeed. Leshi shares now trade at a generous 49 times forward earnings – one and a half times Tencent's multiple. To be sure, analysts polled by Thomson Reuters expect earnings per share to double from 2016 to 2018. But this is a highly competitive sector - and Jia has a lot of other fires to put out.

It surely helps that Leshi trades on the ChiNext, a frothy tech-heavy board full of Chinese retail investors pumping up "concept stocks". The market trades at a whopping 66 times earnings. While Jia's global ambitions have taken a knock, he still has some starry-eyed backers.

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