MEDIA: LeTV Overvalued With CEO Sale, Cheap Share Placement

By newsdoug on May 27, 2015

Bottom line: LeTV’s plans to raise new funds at a big discount and for its CEO to sell a big block of his shares reflect their belief that the company’s stock has become overvalued and could be due for a correction.

Online video superstar LeTV (Shenzhen: 300104) is in a couple of headlines that reflect the recent meteoric rise of its stock, with word that it’s planning a major new share placement as its CEO gets set to sell a big chunk of his shares in the company. Both news bits come amid a rally that has seen LeTV shares soar 5-fold since the start of this year, amid a broader huge rally for China’s stock markets. They also come as LeTV embarks on a major expansion that will take it beyond its core video products into a range of new areas including smartphones and smart cars.

The first news item has LeTV announcing that its charismatic CEO Jia Yueting will sell up to 148 million of his personal shares over the next 6 months. The second has LeTV announcing it will raise up to 7.5 billion yuan ($1.2 billion) through a private placement. The pair of announcements didn’t excite investors, who bid down LeTV shares by 7 percent in the first 2 trading days of the week. But that’s still not too bad for a company whose shares regularly rose by their daily 10 percent limit on many occasions in the first few months of this year.

Before we look more closely at the headlines, I’ll be quite direct and give my view that LeTV’s shares are headed for a major correction by the end of this year. I personally like the company’s innovative business model, which sees it draw customers to its online video products by offering them cheap and well-designed end-devices like TVs and now cellphones. But the company’s price-to-earnings ratio is now more than 200, which is far too high and reflects the broader speculative nature of China’s stock markets.

All that said, let’s begin this LeTV round-up with Jia Yueting, a colorful character who has become quite adept at making news headlines these days. He’s doing that again with word that he may sell up to 8 percent of the company’s shares, which are worth around $1.8 billion based on the company’s latest price. (Chinese article)

I personally can’t blame Jia for wanting to cash out some of his shares, as he’s obviously worked quite hard to get LeTV to where it is now, and made quite a few people very rich in the process. Still, strategically speaking he probably could have done a better job by selling down his stake in the company in smaller pieces rather than announcing such a big potential sale. Perhaps he also realizes the stock could be due for a correction.

Next there’s the fund-raising news, which has LeTV announcing it plans to raise the 7.5 billion yuan through a private placement to up to 5 investors. (English article) It will raise the funds by selling 200 million shares. In an interesting and revealing decision, it will sell those shares for 37.5 yuan each, or about half of their current price. That’s a strong indication that these new investors and LeTV realize the company’s current stock price is probably a bit too high, and that perhaps the 37.5 price is a little more realistic.

The money from the private placement will be used for a number of projects, including building a video library, and developing new apps and a brand marketing system. Some quick math will show the 2 plans combined add up to about $3 billion worth of LeTV stock that could change hands over the next few months, which will inevitably put pressure on the shares. It’s possible the stock could come down to the 37.5 yuan level by year end or even lower, especially if China’s ongoing stock market rally finally runs out of steam.