Chapter 637
Contradiction
Chapter 637 Contradiction (4k)
Liu Hong is the vice chairman of LeEco and one of the founding members who co-founded the company with Jia Yueting.
In his early years, he was the financial head of LeEco. Later, as the company went public, he was in charge of advertising business and related-party transaction management. LeEco's annual reports have also been signed by him.
As an important figure in the LeEco system, he was only informed of the situation by his secretary two days after receiving an email that resembled Guo Shanfeng's.
Liu Hong opened the email, saw the contents, and was struck by the iconic opening line, "Deception will last forever." His heart skipped a beat, and sweat instantly beaded on his forehead.
He naturally knew that President Jia was treating Guo Shanfeng as a formidable enemy, and he was also clearly aware of the pessimistic pressure LeEco had previously faced. The reason for this was, of course, that LeEco itself did indeed have problems.
However, with the cooperation between the company and Sunac, this pressure should have been alleviated in theory.
On the eve of LeEco's resumption of trading, Liu Hong lay in bed late at night, tossing and turning in thought. Jia Yueting was restless, Sun Hongbo went to Hong Kong in person, and rumors circulated that Yu Minhong intended to take action against LeEco. However, upon closer inspection, it seemed that Yu Minhong had not talked much about LeEco from beginning to end and had not given any negative opinions.
He quickly clarified even the headlines fabricated by Hong Kong media.
Throughout the entire process, Mr. Yu only discussed his views on LeEco's car manufacturing privately before the news broke. That was all.
No one has commented on how LeEco's business is doing, how its stock is doing, or how its ecosystem is doing.
Based on the overall situation, Liu Hong believes that the threat from Guoshanfeng is not that serious. Many people are just spreading rumors and creating trouble. President Yu is only in a difficult position because his empty-book status has been exposed.
This judgment became even more firm after LeEco resumed trading.
However... when the "mountain peak" actually appeared before his eyes, all judgment and reason vanished. In that instant, there was only fear, because he was one of the people in charge of the company and knew the inside story best.
Let's not even talk about the consequences of fraud. What about those foreign companies listed on the three major stock exchanges that didn't commit fraud but simply experienced a slowdown in their growth?
"get out!"
Liu Hong opened the email, glanced at it, and immediately ordered his secretary to leave the office.
Three seconds later, he said fiercely to his secretary, "Don't tell anyone this!"
The secretary nodded silently and left the boss's office.
The email on the screen was very long, and its format and style were very familiar to Liu Hong, because he had repeatedly read the short-selling reports issued by Shanfeng, and what was in front of him now was exactly the same.
What made him even angrier was that the contents of the research report were indeed almost identical to the actual situation at LeEco.
The report concludes that LeEco's financial data is completely distorted, with related-party transactions being the core vehicle. It further argues, based on three aspects—the smart terminal business of Super TV, the copyright business, and the advertising business—that revenue and profits are inflated and detached from industry fundamentals.
Liu Hong scanned the email with a gloomy face, repeatedly looking at the survey and verification details, his mind racing with all sorts of thoughts.
LeEco claimed that in 2015, the total number of orders for Super TVs exceeded 300 million units, of which 20% came from offline LePar stores and 80% came from LeEco Mall. The revenue from the terminal business was expected to exceed 60 billion yuan, and the gross profit margin was maintained at over 15%. However, on-site investigations and supplier verification results showed that the sales volume was inflated and the gross profit margin was fabricated.
—1. Inflated Sales Volume: A visit to 23 LeEco Super TV dealers covering core regions of North China, East China, and South China revealed that the actual total volume of goods delivered was only 42 units, with an average inventory turnover rate of 8 months, while the industry average is 3 months. Some dealers had inventory backlog rates exceeding 60%, and there were instances of selling at a loss. The actual retail price was 15%-20% lower than the official website price. Contacting core panel suppliers such as BOE and CSOT confirmed that LeEco's actual panel procurement volume in 2015 was only 180 million units, corresponding to an actual production volume of no more than 200 million Super TVs. This is 300 million units short of the claimed sales volume of 100 million units, indicating an inflation rate of over 33%.
—2. Gross Profit Margin Fraud: Super TVs adopted a "hardware loss-making customer acquisition" model. According to calculations, the hardware cost of a single Super TV is 200-500 yuan higher than the terminal selling price, and the gross profit margin should be -8% to -12%. However, LeEco's financial report disclosed that the gross profit margin of the terminal business reached more than 15%. By inflating the terminal selling price and reducing the hardware procurement cost, the profit of the terminal business was inflated by about 7.2 million yuan, accounting for more than 120% of the estimated net profit attributable to the parent company in 2015.
Liu Hong smoked two cigarettes, staring intently at the screen, before finally snapping out of his daze and calling President Jia.
Then, he glanced at the research report again and couldn't help but sneer: "It's not that amazing. I inflated my numbers more than you think!"
About an hour later, Jia Yueting returned to the company, arriving at his office with a serious and anxious expression. Before he could even close the door, he muttered, "What's going on? What does this mean?"
Liu Hong had studied the report repeatedly and said in a low voice, "Guo Shanfeng has conducted a comprehensive investigation of us. The information provided is close to the company's situation. The television reports are based on actual interviews. The advertising business data is cross-validated using data from iResearch and QuestMobile, and our data is compared with that of iQiyi and others. There are also interviews with major advertising clients..."
LeTV disclosed that its advertising revenue in 2015 increased by 67.53% year-on-year, which far exceeded the average growth rate of 30% in the video industry. It claimed that its user data had experienced a leapfrog growth, mainly due to the broadcast of "The Legend of Mi Yue".
However, according to QuestMobile data, LeTV's daily active users (DAU) in 2015 were about 800 million, only 30% of iQiyi's. iQiyi's advertising revenue in 2015 was 33.98 billion yuan, and the reasonable advertising revenue should not exceed 10 billion yuan. There is a gap of at least 16.34 billion yuan between LeTV's disclosed 26.34 billion yuan and the inflated amount is more than 62%.
Upon hearing this, Jia Yueting quickly went to the computer and saw the research report on the mountain peak.
The above findings certainly live up to Liu Hong's claim of a "comprehensive investigation." In addition to business issues, there are also anomalies in accounts receivable and prepayments, problems with operating cash flow, and a large number of undisclosed related-party transactions.
—As of December 31, 2015, LeEco's accounts receivable balance increased to RMB 86.3 billion, accounting for 66.3% of its annual revenue of RMB 130.17 billion. Its accounts receivable turnover rate was only 1.8 times per year, while the average for the video industry was 4.5 times per year and the average for the smart TV industry was 5.2 times per year. Youku Tudou's accounts receivable turnover rate in 2012 had already reached 0.59-0.68 times per quarter (an annualized of approximately 2.36-2.72 times per year). LeEco's turnover rate was significantly lower than its peers, indicating a serious lack of ability to collect payments.
— 51.85% of LeEco's accounts receivable come from related parties, mainly non-listed entities such as LeEco Zhixin, LeEco Pictures, and LeEco Sports. Moreover, the collection cycle is far longer than the 18 months stipulated in the contract, while the industry average is 6 months. In essence, it is an interest-free loan from the listed system to the non-listed system, rather than accounts receivable corresponding to actual revenue.
The core problem of widespread financial fraud is the existence of profits without corresponding cash flow. LeEco's listed system exhibited this characteristic. In 2014, its net cash flow from operating activities was 2.34 million yuan, but in Q1 of 2015 it was -2.80 million yuan, 4.65 million yuan in the interim report, and 8.10 million yuan in Q3. The total net cash flow from operating activities for the year was only 10.2 billion yuan, while the estimated net profit attributable to the parent company in 2015 was 5.73 million yuan. The difference between cash flow and net profit reached 4.47 million yuan. After deducting non-recurring cash flow, the core operating cash flow was only 7.45 million yuan, which is seriously inconsistent with the real profit after the inflated figures. In essence, it was a book profit but an actual loss of cash.
Jia Yueting didn't finish reading the research report; he only read about half of it before slamming his fist on the desk.
He said with anger and hatred, "I knew that bastard wanted to kill us!"
Liu Hong felt a chill run down his spine. His gaze involuntarily swept over the "Non-listed System Verification" section on the screen. He licked his dry lips and said, "How about we take a break from that? Those businesses are moving too fast."
LeEco's non-listed entities include LeEco Auto, LeEco Smart, LeEco Pictures, LeEco Sports, and LeEco Cloud. Unfortunately, they are basically unable to generate profits or raise funds independently and rely entirely on the financial support from the listed entities.
Just as the research report argues, such financial black holes could become a fatal hidden danger that drags down the listed system.
Liu Hong is well aware that the non-listed system currently has a cumulative funding gap of at least 100 billion yuan. The capital injection from Sunac's investment only provides temporary relief and cannot solve the fundamental problem.
Jia Yueting categorically rejected the idea: "No way! If those things stop, the stock price will immediately collapse! That's suicide!" The reason he feared Yu Xing's influence was that he was worried that Yu Xing would cause LeEco's stock price to plummet, leading to the forced liquidation of the pledged shares. However, LeEco's current stock price also relies heavily on the support of those non-listed stories.
Without the ecosystem concepts of LeEco Zhixin, LeEco Pictures, LeEco Sports, and LeEco Auto, LeEco's stock price would have fallen.
Jia Yueting must not allow the stock price to fall into a dangerous range until he finds funding to alleviate the problem.
Liu Hong rubbed his face hard, staring blankly at Guo Shanfeng's report, not knowing what to do.
Jia Yueting paced back and forth in his office with a grim face, considering the unexpected situation before him.
Liu Hong suddenly suggested, "President Jia, why don't we find President Sun and have him take a look at the situation?"
Jia Yueting refused again: "No, if he sees this, our own internal situation will fall apart first!"
Sun Hongbin had reviewed a lot of packaged financial data in preparation for the cooperation with LeEco, and believed that LeEco, which was under financial pressure, still had a lot of room for revitalization and had high cooperation value.
However, the financial pressure is real, but the extent of that pressure is an oversimplification.
Liu Hong fell into an uneasy silence once again.
Jia Yueting wandered around for a long time, already considering how to leave the country. Suddenly, an idea flashed through his mind. He looked at Liu Hong and asked a question: "Why did he send it to you?"
Liu Hong looked at President Jia blankly: "Huh?"
"Why did he send you the report? Why didn't he make it public?" Jia Yueting muttered to himself, puzzled.
“He…” Liu Hong hadn’t thought about this question, and hesitated before repeating, “Why doesn’t he go public? This… this is a little strange.”
"Does he dare not? What is there for him not to dare? He's such a big short seller, he dares to short German companies in public, and he dares to short so many companies at once," Jia Yueting said, frowning.
Upon receiving this reminder, Liu Hong suddenly realized something was amiss: "Yes, when Yu Xing exposed it, he was shorting Huishan Dairy. Rumors say that the local authorities in Huishan even called Yu Xing to put pressure on him, but he still withstood the pressure and directly crushed Huishan Dairy. He... he wouldn't be afraid!"
Huishan Dairy has been suspended from trading since its stock price plummeted, but it has not resumed trading after more than two months. Furthermore, there are reports that the major shareholder has moved funds to invest in real estate.
Although it was just a rumor, under normal circumstances, the local authorities would definitely try to protect the company. However, Yu Xing, who was in the eye of the storm at the time, didn't try to explain; instead, he prioritized eliminating Huishan Dairy...
As Liu Hong thought this, he felt a murderous aura wash over him, and his heart trembled.
When Jia Yueting looked at the email again, he was full of doubts. This "passing the mountain peak" was unreasonable.
Assuming this really is a mountain crossing, what is its purpose?
Extortion? Impossible. Why would President Yu ask for such a small amount of money in this way?
Pursuing profits? Impossible. The Lingang project offers far greater potential profits than LeEco.
Amplify his fame? How much more famous can the king of short selling be? Besides, this hasn't been made public.
Jia Yueting was completely baffled. Since he couldn't find a "real" reason, what if it was "fake"?
If this was a crime of worship or imitation of a mountain peak, then it seems not so difficult to explain.
Such a targeted email is more like a demonstration or a threat. As for why it wasn't circulated publicly...
Jia Yueting had no idea what the person behind the emails was thinking.
As Liu Hong listened to President Jia's analysis, his mind gradually calmed down, and he also raised an idea: "Yu Xing wasn't the only one who went over the mountain peak. Could it be that they originally had an investigation into us, but now they disagree?"
Jia Yueting shook his head slightly, feeling conflicted, but now he couldn't find the sender and couldn't figure out the other party's purpose.
“So, you contact him and see what he wants. If he wants money, then it’s easy to say, and it definitely isn’t Yu Xing.” Jia Yueting had an idea to take advantage of this opportunity to solve the problem once and for all. “If there’s no response, then you can delete and modify this thing, create obviously wrong content, and release it in this ‘over the mountain’ format.”
“We can’t stay in Yu Xing’s shadow forever. So I took this flawed research report and forced Yu Xing to admit that it wasn’t his work, and to deny Guo Shanfeng’s bearish views on LeEco.”
“If anything similar happens again in the future, we can use Yu Xing’s words to deny it.”
Jia Yueting became more and more energetic as he spoke: "Silicon Carbon Group is currently conducting roadshows, which is a crucial period for its listing. He has also caused so many controversies. I don't believe he hasn't been warned or is under pressure!"
"Damn it, besides, what's the point of him shorting LeTV? We only have a pittance!"
There are very few securities available for LeEco, so short selling is almost unprofitable.
Jia Yueting felt that Yu Xing was indeed hostile towards him, but he believed that by creating pressure by mixing truth and falsehood and then confronting him with obviously flawed information, he could resolve the potential danger at its source.
Listening to President Jia's idea, Liu Hong said worriedly, "President Jia, this... Yu Xing is a dangerous person, getting so close..."
After pondering the matter for a long time, Jia Yueting finally exhaled and said, "This move is risky, but the chances of success are high."
He slumped into a chair, staring at the glaring research report on his computer screen. He could no longer tolerate the Damocles' sword hanging over his head and resolved to simultaneously manipulate public opinion and resources to completely eliminate the hidden danger that could drag LeEco into a death spiral.
(End of this chapter)