Tech

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

Leshi Internet Information & Technology Co. may have found itself a saviour.

Jia Yueting's video-streaming business looks set to raise more than 10 billion yuan ($1.4 billion) from a group of undisclosed strategic investors as it struggles to pay suppliers across an empire that includes smartphones, TV sets and electric cars.

A bailout would be welcome news, because even a diluted shareholding is better than a worthless one. But it's important that this new money come with some clearly defined provisions: Crucially, including one that would restrict how many shares of his own Jia can pledge against loans.

Offering stock as collateral is common in China and often doesn't pose a problem. Much of the time, the cash is plowed straight back into the business to fund expansion. While such a strategy means executives have even more skin in their own game, it's also a very risky and excessive form of leverage. That's because if a company can't pay its debts, then its shares are already likely to be heading south. As they drop, their value as a pledged asset shrinks, creating a twin stock and credit death spiral.

Fortunately for Jia, Leshi was able to hit pause on that scenario by halting trade in its shares on Dec. 7 as negotiations regarding a capital injection proceed. But you can be pretty sure that whatever the outcome, terms won't be too rosy for existing investors.

Le Slide
Leshi's stock has tumbled amid liquidity concerns
Source: Bloomberg

Any new investors should be in a position to force Jia into limiting share pledges. Hopefully, they'll have a few words with him about fiscal discipline and business focus, too.

Low Gear
If Tesla can't post annual net income, then prospects aren't great for Chinese-backed electric-vehicle maker Faraday & Future
Source: Bloomberg
Note: Chart shows Tesla's net income

Take Faraday & Future Inc. The Los Angeles-based maker of electric-sports vehicles is an expensive hobbyhorse for Jia at a time when even Elon Musk can't manage to turn Tesla Motors Inc. profitable. While Faraday's "car of concepts" sounds like a beautiful dream, what Leshi and its shareholders deserve is a chairman and president who has his feet on the ground rather than head in the clouds.

If they've any sway at all, the first thing Leshi's white knights will do is force Jia to offload some of his white elephants.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net