It was a sunny day in Beijing at 13’o clock of July 18, 2014. But the weather was overcast at headquarter of LeTV. For Jia Yueting (贾跃亭), this was a vital exchange meeting of investors. Two days earlier, a sudden policy “black swan” assaulted LeTV in its heyday.
LeTV was taken by surprise. Institutional investors are running away. On July 16, four institution seats were sold for 303 million yuan, taking up 24.31% of the total transactions. In only two days, the market value evaporation of LeTV is 63.5 hundred million yuan.
In the golden 72 hours from July 16 to July 18, Jia Yueting, who was abroad at the time, operated a capital rescue for LeTV by remote control.
Every step of Jia’s action in this “air attack” involves the gigantic value-added chain behind each role in this play. It provides experience for companies that the capitals of which are going short.
Under strict control of the granting of Internet TV integrated license plate, the “ecosystem” in which LeTV lives in is facing a “closing loop crisis”. How will Ja deal with the aftershocks of his temporary success in the company’s swift transformation?
The real “24 Hours”
Jia’s tempo of the oversea business development was broken by a rectification ordered by SARFT (State Administration of Radio Film and Television).
From July 17 to 19, in 72 hours, although Jia was abroad, he contacted intensively with the company managers. As the head of the most valued company on the GEM listing, when he started building the LeTV “ecosystem”, Jia used to tell a lot of stories to the world. Now, in 72 hours, he has to persuade the investors to stay with some new ones.
It all started from July 15.
On July 15, a report titled “LeTV criticized by SARFT as ‘having serious offense’, cooperation with integrated service license providers are suspended”. The report announces that SARFT issued supervision orders on Internet television and set-top box. One of the orders is requiring license providers to stop working with Internet companies that are under investigation of SARFT. The reported also points out that LeTV is one of those companies named and criticized by SARFT.
It is not the first “Clear Net Operation” initiated by SARFT. But it is the first time that all the arrows are pointed at LeTV. The policy change will have severe impact on the current profit model of LeTV. The ecosystem it is working on will not be able to close its loop.
“Our first response was, if SARFT were to return the right of broadcast to CNTV, BesTV (百视通)、Zhejiang Huashu (浙江华数)、CRI (中国国际广播电台)、CNR (中央人民广播电台)、Hunan TV (湖南电视台) and Southern Media Corporation (南方传媒), then LeTV will not be able to provide differentiated contents, which means no one will pay for the 490 Yuan membership fee it charges. ” says a team member of TMT, a brokerage research institution in Beijing.
At the day of news release, the above-mentioned TMT team had a heated discussion in the office. At first, no one knows the subtext of SARFT. Speculations were all over WeChat and QQ. Researchers tried to confirm the information in different ways. They even invited someone from SARFT to give a lecture, in order to interpret the policy.
The capital market, however, is sensitive to all the policy signals, as always.
On July 16 and 17, the stock price of LeTV had a dramatic fall. In two days, the price was down by 20%. On July 17, the stock was down by its limit. Institution seats occupied four of the five top sellers on the selling chart. The aggregate selling price was 303 million yuan, 24.31% of the total turnover.
In the second quarter this year, the LeTV stocks were held by 42 funds at a total of 58.0617 million shares. The market value of all the shares is 2.549 billion yuan. The biggest shareholders are TNOW (大成蓝筹)、Huaxia Returns (华夏回报) and Tianfu Focus (添富焦点), with a total market value of 6.73 hundred million yuan.
In two days, the loss of LeTV’s market value adds up to 6.3 billion Yuan. The remaining value is 27.4 billion. In a week, its market value bounced to 30.9 billion, which is still far away from its original market value at the beginning of this year (over 40 billion yuan).
If the negative mood of the capital market is irreparable, LeTV will probably face the biggest crisis it has ever encountered this year.
Jia’s golden 72 hours
For Jia Yueting, the clock is ticking.
In the evening of July 17, LeTV clarified emergently that the reports on “LeTV being the Internet company criticized by SARFT” are not true.
At noon of July 18, LeTV posted another notice that the company’s stock will be suspended from July 18, 2014 (Friday). It also announced that an exchange meeting of investors will be held at 1’o clock that afternoon.
One of the investors in Beijing said that the danger in the capital market in the recent two days has a great impact on Jia’s company. The disadvantageous policy brings panics to the investors. “What attracted investors is the ecosystem of LeTV. If the system is wrecked, then its stock is of no investment value.”
At 1’o clock that afternoon of July 18, in the 17th floor conference room of Hongcheng Xintai Building in Yaojiayuan Road, Beijing, members of the director board and top managers of LeTV all attended the meeting. Jia, the chief director and chief manager of the company, joined the meeting by remote video.
With Jia joining the conference, more or less, confidence is regained.
The sell-side analysts and buyer researchers on the scene were calculated at least 100. The number of those who were linked by phone were approximately 1000. This conference will have a great influence on the decisions of the participant fund managers.
The themes of the meeting, as recalled by a researcher, were the license issue and the oversea business extension of LeTV. "In the short term, the corrective action will focus on the LeTV box. The license issue will not affect its ecosystem, according to LeTV. As for the oversea business, the descriptions are vague."
The first section of the meeting was Q&A. Then Jia joined the meeting via remote video. "Mo Cuitian, the chief manager of the oversea department, also joined the meeting via video. It released a signal to the investors that they are preparing for the oversea business extension."
"From the Q&A section, we can see that LeTV was fully prepared. It has almost thought of all the possibly asked questions. There was no surprise in answers for questions at business level, as many institutions had that part covered earlier by inquiring in different ways.” said the researcher, “But in the meeting, LeTV conveyed three signals to stabilize the market: first, the box is in fact a problem and LeTV is in positive cooperation with SARFT in rectification. In the long term, however, it will not hurt the ecosystem; second, LeTV indicts its good relationship with government by stating that they are 'cooperating with the Propaganda Department to create a Party Construction Channel' and are 'striving for a content license'. Third, LeTV tells new stories of oversea layout."
When the stock of LeTV resumed trading, its price went up. At the end of the day, the stock price goes up 7.84% and closed at 35.21 yuan. The investors accepted LeTV’s explanation to some extent.
However, misgivings remain. In the top five selling seats in July 21, one is an institution seat. The selling price is 17.0513 million yuan. Same, there is also an institution seat in the top five buying seats. The buying price is 13.8559 million yuan.
"I am not worried about the business model of LeTV. When the stock price went down, I thought of buying. But considering the fact that Jia has not returned from abroad, I did not feel safe." A fund manager told us.
The return date of Jia, which concerned all the institutions, also popped up at the conference as the last question. "The answer of LeTV was in three to four weeks, which forms an expectation for everyone." The above-mentioned manager told us. The story of LeTV is not finished yet.
On July 23, LeTV announced its strategic cooperation with Chongqing Radio & Television and Chongqing Cable. From the perspective of the above-mentioned participant of the meeting, this is a cash-in of LeTV’s promise of "actively applying for a content license".
However, a TMT analyst told us that the content license is not the key issue. “The most valuable thing is the Broadcast & Control Platform. It decides the contents of your broadcast.”
Friendly relations with institutions
Three figures makes LeTV remembered forever by the market.
On January 31, 2011, the market value of LeTV is 4.77 billion yuan. On January 30, 2014, the market value is 41.04 billion yuan. In only three years, the market value grows 6.8 times. LeTV becomes a legend on the startup board.
Thus, in the eyes of investors, July 16 and 17 will become an engraving experience for Jia. In only two days, the market value evaporates 63.5 hundred million yuan.
The rise of its market value is largely attributed to the institutions. The Wind data shows that at the end of 2010, 5 funds hold the shares of LeTV. At the end of 2011, the number is 11. 2012, the number raised to 21. At the end of 2013, 37 funds joined the club. The end of 2013 is a key period of the raise in market value of LeTV. From what we see in the last two years, Huaxia (华夏)、Great Wall (景顺长城)、Rongtong (融通)、Dacheng (大成) and Jiashi (嘉实) are five public funds that hold the most LeTV shares.
“The participation of institutions has great impact on the market value of LeTV. That is why LeTV values its communication with institutions.” Said the above-mentioned investor.
It is not easy to convince institution investors who has researched in hundreds of companies. Why is LeTV successful?
“First, you have to plan the growth path, the strategy and the logic of your company really well, making it a real eye-popper for the investors and analysts.” An expert in market value management service in Beijing said so. “LeTV is good at letting the world see the expectation of a healthy growth of its future performance. Normally a video website is a platform, but LeTV builds a whole industrial chain. It goes both upstream and downstream, making contents, TV and terminals at the same time. It aims to fill people with the impression that it is the number one in the future Chinese video world. ”
Second, how to accurately relate the investment highlights to people? LeTV frequently holds news conference and exchange meetings of investors, endeavoring to build an image of “a game changer”.
One of the institutions that contributes greatly to the raise of LeTV market value is the CICC (中金公司). The above-mentioned TMT researcher told us, “CICC pushes LeTV real hard. If LeTV is in trouble, people from institutions will contact CICC researchers for information almost immediately.”
At the meeting, most questions also come from CICC. Of all the research reports of LeTV, CICC provides a good number, with most of them leveled “recommended”.
In its communication with CICC, LeTV illustrates its development route and model clearly. One case was that on May 16, the media group of the research department in CICC participated in an exchange meeting of investors. The meeting summary reveals that the investors had a thorough inquiry. Over 60 questions are asked, and the answers by LeTV are rich and informative.
LeTV used almost all the measures for market value management. After convincing the market, it trades equity and stock-for-stock at high-order.
The data from Wind shows that from March 8, 2013 to July 8, 2014, two of the shareholders, Jia Yueting and Jia Yuefang, finished pledging stock rights 33 times.
On December 26, 2013, the case of LeTV merging Hua’er Film and Television (花儿影视) and LeTV New Media (乐视新媒体) was passed by CSRC (China Securities Regulatory Commission). The closing price that day was 39.8 yuan, raising 4.33%. In the following trade days, the stock price of LeTV rose to a great height. The closing price of January 23, 2014 even reached 53.33 yuan. During the period, LeTV had several limits. In the beginning of this year, it has become the highest market value company on the startup board.
After delineating an excellent expectation of future achievement, LeTV provides equity incentive plans just in time. It is another positive signal for the secondary market.
On May 29 this year, LeTV published 5 first phase equity incentive plans. The closing price that day was 40.05 Yuan, falling by 4.32%. In June, however, the price of LeTV went high again, starting from June 5, when the price went up by 7.36%. The closing price on June 17 was 48.3 yuan.
The Closing Loop Puzzle
Good stories and professional market value management makes LeTV the super star on the startup board. But this summer, the short come of the LeTV ecosystem which is the base of its story, was exposed by rectifications.
As early as in 2012, LeTV has brought up the concept of “ecosystem”. At the time, LeTV was tired on its way into the OTT market. The income from copyright distribution and commercials are not sufficient for its development. However, the arrival of “ecosystem” recharged LeTV for the upcoming fights.
The so-called ecosystem is an eco-model of “platform + contents + terminals + applications”. It is a completed eco chain from the upstream content production, to the content platform aggregation, then to the terminal coverage and application input. Luo Lan, an analyst from Analysys International (易观国际), believes that the highlight of LeTV is its ecological layout. In the long run, the system has a great synergistic effect.
LeTV drew four outlines for its profit model: profits by selling the terminals; benefits from paid video request business; advertisement; divides from the application market.
The greatest obstacle in closing the loop is the terminal.
The LeTV box which is ordered to be rectified by SARFT is not a real terminal. LeTV lacks television terminals that solely belongs to itself. Jia and his colleagues have already seen this. The birth of LeTV super television is intended to add weight to the closing point of the LeTV ecosphere. Thus, LeTV is still confident on the ecosystem although the LeTV box is facing difficulties of both poor income and strict rectification.
Although LeTV emphasizes on the strength of its ecosystem, we cannot neglect the fact that it is precisely the terminal – a key section of closing the loop – that was hit hard this time. Luo Lan said frankly that the license is still the biggest obstacle for LeTV to develop its living room market. The absence of a license will directly affect its follow-up video service, service income, ads income, and its customer experience. The privilege of its hardware terminals will also be harmed.
From the perspective of professional, license is a fatal short come of LeTV. It limits the layout on terminals. “If LeTV wants to have a breakthrough on terminals, a license is essential. The effect of LeTV box is minimal. What really matters is the super television.”
He further illustrates the importance of license to the loop closure of ecosphere. To him, the content license that LeTV is fighting for is of little value compared to the integration license. “But the integration license is unavailable now. If LeTV does not have a license and cannot cooperate with the seven B&C platform, it cannot transmit the contents to its terminal -- the super television -- no matter how good its contents are. In this case, super TV is exactly the same as normal TV. Loop closure is impossible to reach. What makes it more awkward is that the profits from selling super TV is poor, not to mention the service fee collection that is driven by selling televisions.
“The ecosphere of LeTV is actually pretty good. At the premise of not considering the policy, LeTV is highly likely to close its loop. However, the license issue will directly reduce the power of terminals”. Said the professional.
Pressure on the capital chain
For LeTV, it is truly an eventful year. Precisely at the time when its ecosphere is questioned, the pressure on its capital chain is also criticized. The standard event is the frequent pledge of stock rights by two big shareholders, Jia Yueting and Jia Yuefang. The data from Wind shows that from March 8, 2013 to July 8, 2014, two of the shareholders, Jia Yueting and Jia Yuefang, finished pledging stock rights 33 times.
A professional familiar with LeTV told us that the capital on the book is indeed stretched.
According to the notice published by LeTV, the cost of terminals in the first season of 2013 is 20.6343 million yuan. This year, the cost of the first season rises to 47.00495 million yuan, accounting for 58.52% of the total cost. In the first season this year, the company earns an income of 1.0269477 billion yuan, rising 200.38% over the same period last year. The profit is 43.7713 million yuan, decreasing 46.74% over the same period last year. The net profit belonging to the shareholders is 85.7103 million yuan, rising 20.52% over the same period last year.
In the face of the sudden rise of terminal cost, the income of the first season seems gloomy.
The above-mentioned professional considers this a key period of LeTV’s construction of “ecosystem”. The investment goes into two fields, contents and terminals. “In order to obtain differentiated contents, LeTV must purchase exclusive copyrights and make their own contents. If LeTV has no differentiated contents, it is doomed in the television selling competition. LeTV should fasten the construction of production lines, as well as the production and sale of televisions. Although its cooperation with Foxconn decreases the cost in producing terminals, the logistics mode it is building is truly costly.
LeTV has announced that its logistics system covers more than 240 cities. In 2014, the number will be 400. Besides, LeTV will build 8 to 10 after-sale service centers nationwide, corresponding with four main sale zones: East China, South China, Bohai Gulf, and Middle China.
“If you know the current phase of LeTV well, then you will understand its frequent stock pledge. The pledge ratio is not as high as it is reported. To ease the capital chain tension, the pledge of this level is normal.” Said the professional.
Mysterious assets
The uprising stock price is stirring the water of the capital market. However, the hidden mysterious assets of LeTV makes the story more perplexing.
Because of limited ways of financing, Jia raised capital by pledging for the sake of developing several assets under the name of LeTV.
Nanjing Bank becomes the exclusive partner bank of LeTV movie when it helped financing 70 million Yuan for the release and propaganda of the movie “Tiny Times”. The loan required not only a company guarantee, but also a personal guarantee that additionally secures it.
Open data shows that the number of subordinate companies of LeTV is increasing. In 2011, there were only 5 subordinate companies. In 2012, the number is 7. At the end of 2013, LeTV owns 11 subordinate companies.
If we look at these assets from the perspective of an ecosphere model, it is easy to realize that all the assets are distributed around the “ecosystem”.
A recent representative case is merging Hua’er Film and Television (花儿影视).
Hua’er has a great team of editors and directors. It has also produced prominent works such as “The Legend of Zhen Huan”. However, the company is still rather small and unitary in genre. When LeTV merged Hua’er with a relatively low price, the contents of LeTV went through a quality change.
LeTV has not only expensive copyrights bought in its early stage, but also film production companies such as LeTV Movie. On one hand, LeTV owns a team that can self-produce TV dramas and movies. On the other, it has many copyrights. This stabilizes its advantage in contents.
In the aspect of terminals, LeTV passed the challenge on to Leshi Zhixin (乐视致新). In June, LeTV held hands with Xinle Capital and increased 5 hundred million Yuan to the capital of Leshi Zhixin. Of all the money raised, LeTV contributes 4.05 hundred million, while Xinle Capital contributes 95 million Yuan. Materials show that the legal representative of Xinle Capital is one of the subordinate companies of LeTV.
After the capital increase, the shareholders of Leshi Zhixin are LeTV Shareholding Co. , Ltd (乐视控股有限公司), Beijing Beimeihong Science and Technology Co., Ltd (北京贝眉鸿科技有限公司) and Shenzhen Guanding Engineering Co., Ltd (深圳市冠鼎建筑工程有限公司).
Materials show that the main business of Leshi Zhixin is selling Internet super TV and Internet set-top box. Up until March 31, the total asset of Leshi Zhixin is 10.85 hundred million yuan. The net asset is 2.93 hundred million.
What needs additional attention is that, behind Shenzhen Guanding Engineering Co., Ltd, there is another involved mysterious power.
Public data shows that the registered address of this company is inside the Longhua Park owned by Foxconn. 80% of the company stocks are held by a company called “Shenzhen Xunfeng Industrial Co., Ltd (深圳市讯风实业有限公司)”. The shareholders of this company are top executives of Foxconn Science and Technology Group.
As a matter of fact, this March, LeTV and Foxconn have announced the establishment of a joint venture company. Foxconn will provide professional turnkey solutions to the LeTV super television and Internet set-top box. Foxconn will also be the foundry of LeTV box C1S.
Apparently, by putting the assets in its pocket step by step, LeTV follows the logic of ecosystem.
From the current market share, we shall see that LeTV is still in the second echelon. As for client number, it is still far behind Youku. In the first season of 2014, the active PC clients of LeTV is 1.3 hundred million. This number of Youku is 2.1 hundred million. The active mobile clients of LeTV is 12.23 million, while Youku has 71.34 milliion.
“Currently speaking, there are two factors constraining LeTV. The first one is brand recognition, which should be further improved. The other is lack of flow import privilege compared to Youku Tudou, iQIYI.com and portal videos. ” Said Luo Lan.
Of the two factors, the first one will fade away when the stories of LeTV increase. But the second one will not vanish unless the license is obtained.
On July 25, the closing price of LeTV is 36.79 Yuan, rising 1.27%. On the official website of LeTV, the sale of 24 thousand super televisions continues to be hot.
How many times should we wait, then, before the loop closure?