(Chinese Version)

Above all, I’d like to congratulate Jia Yueting and LeEco for receiving timely help from Sunac, one of the top ten realtors in China. Still, we chose to issue this report after LeEco’s stock resumed trading in order to avoid any unnecessary criticism and doubt. Its stock came off early highs, which suggests it still takes time for LeEco to regain market confidence.

However, Sun Hongbin, founder of Sunac China, revealed that he was glad to “do something great with little money”, which demonstrated the nature of its investment into LeEco. Yet, the harsh truth might be that Sun has overlooked the possible risk after LeEco’s rounds of brainwashing about its “bogus boom”, which was achieved through high-frequency and high-scope financial leverage and “connected transaction”.

For LeEco, all is ready, except for money; for Sun, LeEco needs nothing but money. Therefore, it seems that they are perfect match. However, the fundamental problem with LeEco might not be just the lack of money. As a matter of fact, it is only a result of the above-mentioned high-frequency “financial leverage” and “connected transaction”, since LeEco doesn't have the ability to make profit through actual business. However, there will always be a huge gap between its cash flow and profitability through actual business.

Currently, LeEco’s major businesses remain in the red, including LeEco Zhixin and LeFil, which are comparatively speaking of better quality and are also sectors Sunac China chose to invest in. Although LeEco include all its profitable business, including VIP member fee and ads, to Le.com, Le.com’s revenue is still not as high as expected. Statistics suggest that Le.com’s profit in Q3, 2016 reached 16.774 billion RMB, but its net profit only reached 493 million RMB. At the same time, however, LeEco’s debt and inventory are soaring.

It is worth noticing that “connected transaction” account for over 44 per cent of the total revenue, while 30 to 40 per cent LeEco’s non-listed companies’ business come from Le.com. For example, 80 per cent of LeEco’s smartphone e-commerce platform’s revenue comes from Le.com.

In other words, while the market scale is basically fixed, LeEco managed to “make up” good-looking revenue books for two companies. Yet, we haven’t taken into consideration of “connected transaction” among non-listed companies.

The reason why I paid closed attention to LeEco in 2016 is that I find traces of two typical phenomena in the Chinese internet world both in LeEco.

One phenomenon is that private equity is becoming increasingly publicly-placed.

A few friends of mine have all been invited to attend close-door fund-raising activity of LeSmartphone and LeCar. “This is like public offering of private equity, and we are all turned into private investors,” an insider explained. At last, some of them who still have senses decided to quit believing that “they are conducting equity investment, not trading stocks like private investors”.

It has become a common practice for Chinese enterprises to hold public offering for private equity before they go public. Still, it’s rare to see a company like LeCar that did so even before Pre-A Series round of financing. Bao Fan, founder of Huaxin Capital, warned in 2016 that the trend to hold public offering for private equity is to become increasingly severe in the latter half of 2016.

After some research, TMTpost finds a financing document of LeCar and noticed an enclosed fund promising 18 months of convertible bonds and 12% of coupon rate, which is certainly quite uncommon in standard equity financing.

I believe few people can understand the relationship between LeCar and Faraday Future (FF) even till now. Among various investment plans, which investment is real, and which isn’t? Are those “amazing” press events of automobiles held by LeCar or Le.com, the public-listed company? Which cash channel did LeEco adopt? After all, it seems that the company on the stage and the one behind the scene are the same.

Moreover, nobody can tell which parks and buildings across the world are really bought by LeEco, which are stillborn. Owing to all kinds of “connected transaction”, few people except from Jia Yueting and a few people around him know what’s actually happening.

The other phenomenon is the outflow of Chinese capital and Chinese enterprises.

I have to say that LeEco is a typical example of such trend. However, I shall not bother to talk much about all those complicated backgrounds and LeEco’s bold assertions about changing the world. Instead, I’d like to share with you one hilarious detail.

During yesterday (January 15th) afternoon’s press conference, Sun Hongbin maintained that he was still optimistic about the automobile market and believed LeCar was way ahead of its rivals. He also mentioned that this was why the mainstream American media spoke highly of LeCar. Well, I can’t stop envying Jia Yueting’s “brainwash” ability. As a matter of fact, PingWest even sorted out a series of LeEco’s “pseudo news”:

“After LeEco’ luxurious but gaudy Bigbang press conference in the US (many Chinese media were also invited), lots of American journalists were quite sarcastic about it. However, LeEco carefully turned these “sarcasm” into “praise”. In an advertorial, LeEco even made up that “Fortune” magazine spoke highly of LeEco and commented that ”Even Apple, Amazon and Tesla failed to do what LeEco has achieved.

Indeed, we can find the above assertion in Fortune magazine’s report, however, if we read further about the context of the “comment”, we may find what’s wrong.

LeEco's North America chief revenue officer Danny Bowman called his company the “best kept secret in technology” and claimed that no other company has the wherewithal to get into as many businesses as LeEco. Bowman, who joined LeEco in March from Samsung, listed Apple, Tesla, Amazon, Google, and his former employer as “some of the world’s most innovative companies” that “can’t do what LeEco can today.”

In other words, it’s a comment from one of LeEco’s own employees quoted by Fortune magazine, not from Fortune itself.

In this sense, Sunac China Holdings’s investment into LeEco this time not only demonstrated Sun Hongbin’s tolerance and ambition, but also gave us hope in LeEco’s future. I do wish to see the regeneration of a Chinese company and became aware of the severity of its complicated and non-transparent “connected transaction”. While LeEco is still boasting that it has “solved the financial problem once and for all”, I wish that it can, once and for all, stop misguiding investors with bold and exaggerated advertising and winning the public’s respect as a real and transparent listed company.

Next, if LeEco really wants to, once and for all, solve all its problems, it has to wait for more investment (brought by this recent investment from Sunac China) into its three major business areas: sports, smartphones and self-driving cars. However, since relevant businesses haven’t been formed, an effective revenue model can’t be developed in a short time. As a matter of fact, developing smartphones is more expensive than developing sports business, while developing self-driving cars is even more expensive than developing smartphones. Moreover, positive cash flow can’t be formed when developing self-driving cars, let alone smartphones and sports business.

Sunac China’s complicated investment plan

According to LeEco and Jia Yueting’s official statement, “7.1 billion RMB is to be transferred to LeEco’s public listed company, while 9.7 billion RMB is to be transferred to LeEco’s entire ecosystem”. Following, I’d like to further comb through the details of this recent investment based on LeEco’s official statement.

1. Which subsidiary will receive exactly how much investment?

(1) Le.com: Sunac (through its full-asset subsidiary JRHX) would invest in Le.com through purchasing 170,711,107 shares from Jiayueting with 6.041 billion RMB. After the transaction, JRHX will become the second biggest investor of Le.com, accounting for 8.61 per cent of the total stake, while Jia Yueting will still be the biggest shareholder, accounting for 25.84 per cent of the total stake.

Conclusion: Le.com’s biggest shareholder Jia Yueting got to cash out 6.041 billion RMB, while Le.com actually received no investment.

(2) LeFilm: Sunac would buy 15 per cent stake over LeFilm from LeEco Holdings’s dominant shareholder with 1.05 billion RMB.

Conclusion: LeEco Holdings got to cash out 1.05 billion RMB, while Le.com and LeFilm received no investment. Jia promised that LeFilm would be added as part of LeEco’s public listed company within a year.

(3) LeEco Zhixin:

First of all, LeRan Investment (I shall talk about this shareholder later in this report) and Huaxia Insurance will add their investment. While LeRan would invest 1.43 billion RMB to subscribe for the newly added registered capital of 12,633,573 RMB, Huaxia Insurance would subscribe the newly added registered capital of 3,533,867 RMB with 400 million RMB.

Next, Sunac will transfer registered capital owned by Le.com and Xinle Capital, 29,235,435 RMB (accounting for 10.3964 per cent of the total new registered capital of LeEco Zhixin)) and 44,178,251 RMB (accounting for another 15.7102 per cent) with a transfer price of 2,301.76 million RMB and 2,648.24 million RMB, respectively.

At last, Xinle Capital will will use the transfer fee to obtain the proportional shares held by LeEco Holdings through parity transactions or other reasonable means and continue to have employees hold stakes. As part of the subscription of newly-registered capital, JRHX will subscribe 3,245,271 RMB newly- registered capital of LeEco Zhixin with 3 billion RMB, accounting for 10 per cent of the total registered capital of theLeEco Zhixin at last.

Conclusion: After these rounds of operations, LeEco Zhixin (related to LeEco’s smart TVs) will receive a total investment of 4.83 billion RMB (1.41 billion RMB plus 400 million RMB plus 3 billion RMB). More specifically, Le.com will get to cash out over 2.3 billion RMB, LeEco’s employee shareholding platform will cash out over 2.6 billion RMB. Since it is stated that the platform will continue to be transferred into LeEco Holdings’ relevant stakes, this sum of money will go to LeEco Holdings at last, so employees will not be able to cash out.

To sum up, Le.com will receive an investment of 2.3 billion RMB, Jia Yueting will cash out 6.041 billion RMB, LeEco Holdings will cash out 3.69824 billion RMB, while LeEco Zhixin will receive an investment of 4.83 billion RMB. That is to say, the biggest beneficiary of the investment will be LeEco Zhixin.

2. The cash-out is just enough to remove the pledge, while Jia is restricted from conducting any other pledges or loans

Based on the investment agreement, Jia Yueting has to keep his pledge rate lower than 50 per cent within the next year, and the first sum of Sunac China’s investment (3 billion RMB) has to be used to remove pledge under Sunac’s supervision.

Here comes the question: on the surface, 7.1 billion RMB seems to go to LeEco’s public-listed company (video streaming service, etc.) and wholly-owned subsidiary (LeEco Zhixin), while 9.7 billion RMB will go to LeEco’s ecosystem and for Jia Yueting to cash out. However, a large part of LeEco’s asset is pledged or frozen. In my previous report “Zhao Hejuan: Will LeEco Tumble Like D'Long Did?”, I’ve already summarized the specific situation in details.

Judging from the guarantee fund due at the end of 2016 and the beginning of 2017, Jia has to use much of the money he cashes out (around 6.04 billion RMB) to remove the pledge he and Le.com conducted together. While LeEco can default on its debt to suppliers, it dares not to default on its debt to banks. Therefore, Jia will first pay back the banks, which means he won’t have much money to utilize even after the cash-out.

Before Sunac China’s investment, Jia already pledged 512,133,322 shares, accounting for 83.64 per cent of his stake, to banks.

After Jia sold all his rest shares (170,711,107 shares) to Sunac China, he will hold 512,133,322 shares in total. Based on the agreement, Jia has to keep his pledge rate lower than 50 per cent. That is to say, he has to remove pledge of over 260 million shares. Suppose the average price is 23 RMB per share, Jia has to use over 6 billion RMB to do so. However, we still didn’t take into consideration Le.com.

Le.com also has a couple large-scale bank guarantees due or expired. If Le.com fails to pay back in time, its asset will also be frozen.

In this sense, it’s already a tough job to avoid asset freezing and close out, let alone to put into its ecosystem. To make sure Sunac’s investment is used properly, Sun Hongbing even asked LeEco to amend its articles of incorporation.

On January 14th, LeEco not only issued a series of announcement over Sunac China’s investment, it also issued “Administrative Measures of External Guarantees” (hereafter referred to as “Measures”). Compared with LeEco’s “Articles of Incorporation” issued on October 31st, 2016, the number of guarantee behaviors to be approved by shareholders’ general meetings is improved from six to seven. “Other types of guarantees based on relevant rules and regulations as well as ‘Articles of Incorporation’” is added to enhance internal management through miscellaneous provisions.

"Measures" not only reaffirmed that the "external guarantees of the company must be approved by more than two-thirds of board directors, or be approved by the general meetings of shareholders," but also added a new rule: "Other types of external guarantees should also be approved by more than two-thirds of board directors.”

“Measures” also pointed out that “In principle, the company shall not provide external guarantee through mortgage or pledge, and that guarantee form should be ‘general guarantee’ at best.”

3. Sun Hongbin will gradually increase its control over Le.com, LeEco’s public-listed body

Although Sun Hongbin didn’t emphasize much on the entire investment process, saying “it’s just one to two projects”, it isn’t risk-free for Sunac China’s cash flow, judging from its own situation.

The following is Sunac China’s information, collected and edited by another TMTpost journalist:

In the first half of 2016, Sunac China's asset amounted to 154.571739 billion RMB, its debt amounted to 127.95584 billion RMB and its shareholders' equity amounted to 26.615155 billion RMB. Its gross profit rate was approximately 13.3 per cent. Based on its report near the end of December, Sunac China’s total sales reached 155.31 billion RMB in 2016. As of June 30th, 2016, the company's asset-liability ratio was 46.0 per cent, while its net debt ratio was 85.1 per cent. In addition, Sunac China’s cash and cash flow for the first half of 2016 was 28.338 billion RMB.

Sun revealed in the press conference that Sunac China had around 60 billion RMB in cash as of the end of 2016. In this case, it’s no easy decision to spend a quarter of its cash flow and invest in LeEco.

“Sunac China’s need for short-term liquidity has to do with the repayment of debts and operating cost, while our short-term liquidity comes from cash balances, proceeds from sale and pre-sale as well as new loans. The Group's need for long-term liquidity has to do with the development of new property projects and the repayment of long-term debt, while our long-term liquidity comes from loans, shareholder investment and share issuance,” Sunac China’s official statement suggests.

Interim report shows that as of December 31st, 2015, Sunac China has borrowed 41.7986 billion RMB; as of June 30th, 2016, the total amount of loan amounted to 6.0488 billion RMB, among which 41.831 billion RMB will be mortgaged through completed property and Sunac China’s subsidiaries.

As a matter of fact, Sunac China’s bold expansion has already been questioned by the market. Based on incomplete survey from various media, Sunac China spent around 49.2 billion RMB on acquisition within less than half a year (since July, 2016). Based on CRIC China’s statistics, Sunac China spent 102.555 billion RMB in purchasing land in 2016, ranking the fourth in major Chinese realtors.

On September 28, 2016, Goldman Sachs issued a research report and pointed out that Sunac China’s debt ratio has risen to 117 per cent. In 2015, Standard & Poor's put Sunac China’s rating on negative watch and hasn’t changed the rating up till now. In 2016, international rating agency Fitch also downgraded Sunac China’s long-term foreign currency issuer rating from stable to negative and made it clear that "If Sunac China continues to take this aggressive approach to purchase land, we will consider further lowering its rating."

In this case, did Sun Hongbin invest in LeEco simply because he thought Jia Yueting was promising or because of friendship? Nobody knows exactly, except for himself. However, it is worth noticing the following two details:

(1) Jia Yueting promised that all LeFilm’s equity would be added to Le.com by December 31st, 2017;

(2) Jia Yueting promised that he would make sure LeEco Zhixin would finish filing record with CSRC by December 31st, 2019 and that all LeFilm’s equity (not held by Le.com) would be added to Le.com by September 30st, 2020;

Therefore, if anything goes right, it is foreseeable that Sun Hongbin will continue to improve its stake in Le.com in the next three to five years and enhance its control over LeEco’s public-listed company.

LeEco's so-called "Ecosystem"

To what degree is LeEco relied on “connected transaction”?

Above all, let’s have a look at the hidden relationship between LeEco’s shareholders. Two shareholders drew much of my attention: one is founder of Shenzhen Xingen Nex-Gen Subversive Technology M & A Fund One Investment Partnership (limited partnership).

Two shareholders drew much of my attention: one is founder of Shenzhen Xin'gen Nex-Gen Subversive Technology M & A Fund One Investment Partnership (limited partnership).

After some research, I find that this fund is founded by four shareholders, including Jiashi Capital Management Co., Ltd, Beijing Shangyu Capital Management Co., Ltd, Chongqing Strategic Emerging Industry Equity Investment Fund Partnership and Shenzhen Xin'gen Nex-Gen Subversive Technology Investment Fund Management Co., Ltd.

Among these four shareholders, we might be very familiar with Jiashi, the first one. The Chongqing-based fund is certainly government-backed, while Zeng Qiang, head of Shenzhen Xingen Nex-Gen Subversive Technology Investment Fund Management, became known to the public since he was “smacked” in the face by Jia Yueting when he tried to voice his opinion about LeEco.

More importantly, the legal person of Beijing Shangyu Capital Management Co., Ltd is LeEco Interactive Technological Development Co., Ltd. and natural person Wu Meng, chairman of board of directors of Le.com. Zhao Kai, chairman secretary of Le.com, happens to be the legal person as well as board member of the company.

In other words, Shangyu might be LeEco’s employee shareholding platform, and this fund might be a partner company of Le.com. In this case, it’s hard to imagine that Jia Yueting really don’t know Zeng Qiang, as he has claimed. After all, they are all part of a community of interests.

Another interesting shareholder includes Leran Investment and Huaxia Insurance, which together invested 1.6 billion RMB. (Sunac China invested another 15 billion RMB, and in total they invested 16.8 billion RMB in LeEco)

After some research, we find that Leran Investment is actually Ningbo Hangzhou Gulf Leran Investment, whose registered asset is 3.55 billion RMB. The company has four shareholders, including Letou Investment Management Co., Ltd, LeEco (Beijing) Holdings, Shenzhen Yingda Capital and Linfen Investment Group Co., Ltd.

More interestingly, Le.com mentioned in a less-known announcement that Leran Investment was actually controlled by Jia Yueting. That is to say, Leran Investment is also connected to Le.com.

More specifically, Shenzhen Yingda Capital, backed by National Grid, invested 2 billion RMB, while Linfen Investment Group Co., Ltd, backed by bureau of Finance of Linfen city government, invested 1 billion RMB

In other words, national asset, insurance asset, real estate asset and local government asset are involved in LeEco’s recent round of financing.

It is worth mentioning that Yingda Capital teamed up with Lenovo Holdings participated in the Pre-A Series round of financing of LeCar. Based on the financing document, Aston Martin will be the OEM for FF’s earlier new car models.

So what is FF, exactly? I believe nobody knows exactly up till now. When we search on American government’s official website, Jia Yueting seems to be the only shareholder of Faraday&Future Inc. However, the company’s registered address was changed from California to New York State in March 2016 for unknown reasons.

What about “connected transactions” throughout LeEco’s business, then?

There is no doubt that there are “connected transactions” not only between all companies under LeEco’s ecosystem and Le.com, but also between LeEco’s non-listed parts and LeCar. However, nobody knows exactly what’s going on.

Although Jia Yueting claimed that he didn’t know Zeng Liang (said to be the second biggest shareholder), it seemed that he had close cooperation with Jia and knew very clearly how LeEco’s ecosystem works. What annoyed Jia might be that he revealed in the interview that Jia could “dispose of all the asset in the ecosystem as he wishes”.

It is obvious that all companies inside LeEco’s ecosystem are related to LeEco’s public-listed body. Based on our search result at the Bureau of Trademark, LeFilm, LeCar, LeSports, LeTV, LeMusic, etc. are all applied or under application by LeEco’s public-listed body. Therefore, brand reputation of all companies inside LeEco’s ecosystem may rise and fall together.

Connected transaction accounted for 44.61 per cent of Le.com’s revenue in the first half of 2016 (10.063 billion RMB).

Based on New Beijing News’s report, Le.com sold products worthy of 3.278 billion RMB to Lepa Marketing Service (Beijing) Co., Ltd, a company highly-connected with LeEco, in the first half of 2016. Moreover, we find that Le.com will sell its VIP member service together with smartphones on LeMall e-commerce platform. If users add a certain amount of credit on Le.com, they will be given gifts randomly.

However, these gifts all belong to LeEco’s ecosystem. Therefore, it came as no surprise that Le.com purchased goods worthy of 7.9146 million RMB from Lepa, and products worthy of 779 million RMB from Le Mobile Smart Company in the first half of 2016. In addition, Le.com purchased products worthy of 2.203 billion RMB from Le Smartphone E-Commerce Company.

That is to say, while Le Mobile Smart Company put ads and provided VIP membership service on Le.com, Le.com purchased products (including smartphones) from Le Mobile Smart Company and Le Smartphone E-Commerce Company. Besides, since VIP membership service is sold together with smartphones, corresponding revenue will also be included in Le.com’s financial report.

As a matter of fact, the majority of revenue of some companies inside LeEco’s ecosystem comes from “connected transaction”. For example, Le Smartphone E-Commerce’s revenue in the first half of 2016 amounted for 2.638 billion RMB, yet Le.com contributed to 83.51 per cent.

At the end last October, Le.com issued a report, saying that the total volume of its “connected transaction” was to reach 8.149 billion, while its total sales was to reach 9.089 billion RMB. Le.com even stated that the increase of “connected transaction” would contribute to the rapid growth of the company’s overall growth throughout the year.

Based on New Beijing News’ calculation, the volume of “connected transaction” was only 28 million RMB in 2013. That is to say, this figure skyrocketed by 600 times from 2013 to 2016.

Although Jia Yueting and his family members don't have the dominant control on the surface, they manage to control all the independent financing bodies throughout LeEco’s ecosystem via complicated “connected transaction”.

Comparing LeEco with D'Long again

To demonstrate the risk of “connected transaction”, I will have to compare LeEco with D’Long again. As a matter of fact, D’Long met its demise exactly due to “connected transaction”.

After I issued the previous report “Zhao Hejuan: Will LeEco Tumble Like D'Long Did?”, many people quarreled over if LeEco was another D’Long. At this point, I’d like to make it clear that for sure, LeEco isn’t D’Long. Back in D’Long’s time, capital structure and mechanism of financing was still quite simple; in comparison, LeEco turned to multi-level capital markets, bond market, new three board, PE, VC, banks and even P2P. To some extent, wherever there are “money”, there will be LeEco.

Tang Wanxin, founder of D’Long was arrested due to illegal deposit-taking and manipulation of the stock market. D’Long’s demise had much to do with the special environment of China’s capital market. Still, many public companies that used to belong to D’Long prove to be valuable in the secondary market today.

You may ask: why do I bother to compare them when they are different? Well, when we look at D’Long and LeEco regardless of the evolving market background, we may find something really interesting.

Although the Chinese capital market has developed, evolved and standardized a great deal since D’Long’s demise, it doesn’t mean we should ignore D’Long’s lesson.

At the same time, financial disintermediation has also experienced several decades of drastic changes both in the United States and China. If we look back on the previous financial risk events from the point of historical period and environment, regardless of the infiltration and evolution of financial industry and the real economy, we might be too outdated and even pedantic.

As a matter of fact, D’Long’s demise has to do with the collapse of its “connected transaction” chain. To avoid doing anything that may arouse suspicion, I shall quote part of the article of David, an expert in D’Long’s demise:

“D’Long’s corporate structure is similar to that of other Asian family enterprises. By expanding their network of businesses and gaining control over their subsidiaries, large family-owned Asian enterprises manage to maximize the benefits of their families.

Based on Michael Backman’s research, such family-owned enterprises often adopt a pyramid corporate structure. A family holding company is at the top of the pyramid, companies with the highest valuable asset in the family business group is at the second tier of the pyramid, listed companies take up the third tier, while listed companies with strong cash flow generation capacity or high-profit are at the bottom.

Under this pyramid corporate structure, interests are transferred bottom-up. By issuing stocks of lower-level companies to the public and various “connected transactions”, companies on the top can transfer profit of lower-level companies to top while shrinking the risk to lower-level companies. Other ways include: having lower-level companies transferring their high-quality asset at a low price, low dividends, debt guarantees between connected companies and so on.

Owing to the features of China’s primary stock market, "investors" were lacking in proper investment knowledge, while supervision mechanism was also inadequate. Therefore, it was possible that "dominant shareholders" could earn huge profits through rising stock price on the stock market. When upper-level listed companies invested downward or allot shares, the market would often regard such gestures as "good news", and thus driving the stock price upward. After gaining control of listed companies with low cost, D’Long began a series of investment activities.

Such investment activities were often frequent, small-sized and diversified. Therefore, the direct result is that such investment activities didn’t rely on its own funds, but relied on “connected” companies’ secured mortgages or funds gained through allotment of shares. Therefore, it wouldn’t bring direct economic benefits to existing listed companies (such as scale effect). The only purpose was to create good news for the secondary stock market.

In this process, D’Long needed a lot of money to support its frequent investment (including investment in traditional industries), which could be divided into two types: one was bank loans gained through guaranteeing for each other among “connected companies”, which formed the following cycle: mortgage-bank loan-investment-re-mortgage-re-investment; the other was funds raised by various types of financial subsidiaries, including trusts, leases, securities and insurance companies, owned by D’Long. This was a key component of D’Long’s financial ecosystem. Statistics suggest that from 1997 to 2004, 20.2 billion RMB was raised for D’Long, mostly through financial management entrustment."

LeEco is lucky since it doesn’t have to rely solely on bank loans and financial management entrustment. Fundamentally, however, LeEco is repeating D’Long’s path through rounds of mortgage and investment.

A key factor leading to D’Long’s demise was rampant “connected transaction”:

“Through connected transactions, D’Long managed to elude laws and regulations and conduct rounds of connected mortgage, which not only maximized benefits, but also maxmized risks and undermined interests of private investors.

There were a large number of undetectable connected transactions inside D’Long. Through connected transactions, it was easier to dispose of funds inside the group. When the mother company mortgaged high-quality asset for bank loans, and lent the money to other connected companies inside the group, these connected companies would continue to invest in other companies having nothing to do with their mother companies, which significantly maximized the risk.

Information non-transparency: By focusing on assets and cross-industry portfolio, D’Long deliberately concealed the real situation from the public through such combination, which made it difficult to figure out the company's real situation, especially the actual holding situation. Looking back, people found that D’Long’s real capital was quite blurred and that ‘only Tang Wanxin himself knew what’s really going on.’

These problems are interlocking, but the core problem is that: the actual controller can have absolute control over listed companies through limited fund due to a complex enterprise structure, which undermines the interests of minority shareholders while maximizing controllers’ own interests."

After reading David’s analysis, did you find any similarity between D’Long and LeEco? For sure, LeEco is not identical to D’Long. After all, they emerged in totally different market environment. However, they are quite similar in expanding themselves through complicated and non-transparent “connected transactions” and capital leverage methods.

Still, I prefer to believe that Sun will adjust LeEco’s corporate structure between its listed body and other connected companies, improve risk control awareness and guide LeEco into the right track. Perhaps, only perhaps, Jia Yueting will stop raising funds through high leverage. Nevertheless, the market will “vote by foot” based on LeEco’s actual performance.

Afterword

“Connected transaction” itself is a neutral term, not a pejorative one. However, since has much to do with interests of related parties, it has always been a very sensitive area.

As is discussed above, D’Long’s demise had everything to do with the complicated and non-transparent “connected transaction”, while its founder tested the law and got punished accordingly. The Chinese government has always been very sensitive about the management of “connected transactions” and has kept improving relevant laws and policies. However, since they are still not complete, there are still loopholes. Nevertheless, we have confidence to believe that transparency and fairness will increasingly be upheld and safeguarded in this area.

I myself also call on CSRC and other related departments to fix these loopholes in the primary and secondary stock market as well as pay more attention to the public placement of private equity and complicated “connected transactions” emerged in this new financial environment.

There’s no such thing as black and white in the business and entrepreneurial circle, and I myself also don’t think there are absolute right and wrong things. Instead, it’s all about choices. What I really want to say is that please stop adoring such blind, pompous and insane pursuit of dreams, since they are the very barriers in establishing a healthy and tolerant business and capital ecosystem and they demonstrate disrespect to “maniacs” who dare to challenge and innovate in their pursuit of dreams.

This comment targets not merely on LeEco, not on any company. After all, innovation is brought out not by words, but by actions and it takes not only bravery to break the routines but also perseverance to carry on what one started. In the pursuit of truth, we have to not only compete and strive together with a kind heart, but also explore the unknown future in awe.

LeEco is the most valuable case in the Chinese capital market after D’Long, and I shall continue to research into it.

I myself is also an idealist. Otherwise, I won't continue to stick to new media in my entrepreneurial path, though nobody knows clearly what this path leads to. I respect and appreciate those who dare to dream and explore, and personally I respect Mr. Jia Yueting, his dream as well as his all-in spirit.

Many people asked me why I chose to “find fault with” instead of “extol” an entrepreneur, a dreamer, and I also often ask myself why I can’t “appreciate” LeEco. My answer is LeEco is like flowers with no fruit, that is, “specious” for me. It is my wish that after Sun Hongbin’s investment, we will gradually see fruits coming out of this flaunty flower. Only when LeEco really becomes a respectable company will people like me change our opinion towards it.

It’s hard to tell if Mr. Jia Yueting is more a dreamer or a gambler. However, one thing is for sure: he is a public figure and the actual controller of a public, listed company.

When your dream has to do with interests of the public and others, when your behaviors will significantly affect the overall business environment, it’s not simply about being right or wrong, since you have to take into consideration your social responsibility. The more influential you are, the more social responsibility you bear. This is also true for an entrepreneur.

TMTpost has always believed in “changing the world via technologies”, has issued numerous reports about leading innovators in cutting-edge fields and has built various international platforms such as T-EDGE series events for numerous dreamers to shine.

However, as media, the watchdog of human society, TMTpost also believes that: without the freedom to criticize, there is no true praise (Pierre Beaumarchais).

This is also my personal belief.

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[The article is published and edited with authorization from the author @Zhao Hejuan and @Han Pei, please note source and hyperlink when reproduce.]

Translated by Levin Feng (Senior Translator at PAGE TO PAGE), working for TMTpost.