SMARTPHONES: Coolpad Finds New Suitor, as LeEco Retreats

Bottom line: LeEco is likely to sell its stake in Coolpad in the next six months, and new investor Centralcon could emerge as the buyer with a goal of trying to turn the company around.

A potential white knight has stepped forward to provide some funds for struggling smartphone maker Coolpad (HKEx: 2369), in a fresh sign that controlling stakeholder LeEco (Shenzhen: 300104) may be preparing to dump the company as part of its protracted reorganization. The amount of the fund-raising is relatively small at HK$582 million ($75 million), though it could be enough to help Coolpad figure out what it wants to do next.

The more interesting question is whether this signals that LeEco is planning to dump Coolpad and the smartphone business in general, which I’ve been predicting for a while since the ousting of LeEco founder Jia Yueting from the company in July. Smartphones was one of the many businesses that Jia entered at the height of his expansion euphoria, and seems like a likely candidate to be jettisoned as the company’s new managers try to right this foundering ship.

Let’s jump right in with the latest headlines, which say Coolpad has found a buyer for the HK$582 million in convertible bonds in a company called Centralcon Enterprises. (company announcement; Chinese article) I did some quick research on the company, and it appears to be controlled by a relatively unknown man named Huang Guangmiao, who has a background in the car parts and possibly real estate businesses.

According to the reports, Huang’s bonds would entitle him to about 17 percent of Coolpad’s shares if he exercises the conversion when the notes come due. That would make him the company’s second largest shareholder behind LeEco, whose stake would get diluted to about 24 percent from the current 29 percent. The company’s other major shareholder, Data Dreamland, would also see its stake to about 8 percent from the current 9 percent.

This particular lifeline comes as Coolpad bleeds cash in China’s cutthroat smartphone market. The company has yet to publish its 2016 results, though some preliminary figures it released in June show its revenue plunged by half and it posted a preliminary annual loss of about HK$4.2 billion. (previous post) It has yet to report any results at all for this year, and instead seems to be getting sued by its creditors who are worried about the company’s ability to repay its loans.

Of course things were quite different two years ago when the company thought that LeEco would be its savior. At that time Coolpad was starting to stumble when LeEco, which was on the rise, announced a deal to purchase its current stake. The idea was that LeEco would use Coolpad as its main production partner for the smartphone business that was going to be part of its plans for creating an ecosystem of entertainment-related products and devices.

Uncertain Support

Fast forward to the present, when LeEco is hardly in any condition to provide much-needed funds to Coolpad. Instead, LeEco has stayed mum on Coolpad and its other major investments made during the company’s expansion binge, which include new energy cars and ride sharing services, just to name a few of the areas it entered.

All that brings us to the present, which includes a precarious position for companies like Coolpad as LeEco works out its own reorganization plan. I’ve predicted before that Coolpad is likely to get jettisoned as part of that reorganization, probably for a pittance. This latest deal implies a market value of $440 million for Coolpad, meaning LeEco’s current stake would be worth about $130 million.

So what happens next? My guess is that LeEco will probably make a decision on Coolpad in the next 6 months, and that decision will most likely be to sell its stake in the company. It will probably be lucky if it can get $100 million for the shares, since Coolpad is perceived as a company in dire straits and this particular sale will look like a fire sale.

Whether or not Centralcon will ultimately emerge as the white knight remains to be seen. Its purchase of the convertible bond certainly seems to indicate a potential interest, and I suspect we might see Huang quietly get involved in the company’s day-to-day operations to see if there’s any possibility of salvaging the operation. I would put the chances of a successful turnaround at less than 50 percent, though would also probably bet there’s a good chance that Huang will ultimately decide to give it a try.