Deals

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

Apart from cash, the white knight riding to the rescue of Jia Yueting's sprawling technology empire also brings lessons -- both good and bad. 

The Chinese entrepreneur's LeEco has landed $2.2 billion of strategic investments from real estate magnate Sun Hongbin's Sunac China Holdings Ltd., enabling the conglomerate to sustain its rush into businesses from internet video to electric cars. The money is welcome; whether Sun makes a desirable role model and partner for his fellow billionaire is more questionable.

First the good: Sun has ensured that his company is cash-rich. Since going public in Hong Kong in 2010, Sunac has always kept enough in its coffers to cover short-term bonds and loans, whether the funds came from operations or new debt.

Keeping Current
Since listing Sunac, founder Sun Hongbin has always made sure cash is enough to more than pay for debt maturing within the year
Source: Bloomberg

That's a healthy example for a company that, by Jia's own admission, became over-extended after speeding ahead "blindly." Shares of Jia's Shenzhen-listed unit Leshi Internet Information & Technology Corp. climbed as much as 8.9 percent on Monday morning, after a trading halt in place since Dec. 7 was lifted.

The Sunac chairman discovered the virtues of prudent cash management after having to give up on another developer he'd founded, Sunco Group, in 2006. His path to success hasn't been smooth: Sun spent time in prison in the early 1990s after being charged with embezzling company funds, a conviction that was later overturned.

Saliently for Leshi shareholders, Sun's efforts to diversify away from property haven't yielded any positive outcomes. 

In September 2015, Sunac signaled it was looking at becoming a strategic investor in Yurun Holdings Group Co., a meat supplier that was facing a cash crunch. While Sun seemed also to be eyeing the company's land holdings, the deal was dropped less than two weeks later.

Since then, Sunac has kept its focus on property and used its cash holdings to buy assets from Chengdu to Shenzhen, usually from developers facing duress. The strategy, which Bloomberg Intelligence analysts Kristy Hung and Patrick Wong identified as a way to acquire land without having to participate in city auctions, was responsible for two-thirds of the company's new projects in the first half of last year.

That's taken a toll on its balance sheet. Sunac's net debt to shareholders' equity rose to the highest since 2010 at the end of June. At the same time, the company's gross margin dropped to 13.3 percent, near the lowest in its history.

Costly Acquisitions
Sunac has gone on an M&A spree in the past year that pushed its indebtedness to a six-year high
Source: Bloomberg

That recent deterioration is the first reason for caution over Sunac's engagement with LeEco. Sunac investors were certainly unimpressed with its abrupt diversification into the technology field, driving down the company's shares as much as 10 percent in Hong Kong on Monday.

The second reason for concern is what that share decline may mean for Sun's personal financial position. In November, Hong Kong's Ming Pao newspaper reported that the Sunac chairman might have pledged shares equivalent to 46.7 percent of the Tianjin-based developer.

Ironically, that's just how LeEco's Jia got into his current predicament. Part of the reason he's now selling shares to Sun is because he has already used his equity holdings to obtain loans to finance the group's expansion.

Perhaps that's why the two tycoons seem to have understood each other so well. Leshi shareholders can only hope that, in their conversations, Jia has absorbed the value of preserving cash while ignoring the appeal of embarking on more debt-fueled adventures.

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

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net