The Big Loser Is Shenzhen; the Big Reason Is Leshi

(Bloomberg Gadfly) -- Shenzhen is the only downer this year among major Asian stock markets.

The Shenzhen Composite Index, often referred to as China's Nasdaq, fell about 4 percent in dollar terms, a sad result compared with the more than 35 percent gain in the Hang Seng Index. The Shanghai Stock Exchange SSE 50 A-Share Index, the so-called Beautiful 50 gauge of China's top blue chips, advanced 25 percent.

Now Beijing is blaming Shenzhen's dismal report card on one man, Jia Yueting, founder of the LeEco group and the biggest stakeholder in Shenzhen-listed Leshi Internet Information & Technology Corp.

At its height in May 2015, Leshi was worth more than 150 billion yuan ($23 billion), ahead of the cash-cow telecom-equipment maker ZTE Corp. and the sixth-largest firm listed in Shenzhen. Jia embodied the excess of China's 2015 dot-com boom, talking of expanding his tech empire to everything from smartphones to smart cars. The reality was an alarming cash-flow profile. 

Two years on, the picture couldn't be more different. Leshi trading has been halted for eight months after the stock lost two-thirds of its value, and Beijing is making a half-hearted attempt to claw back money for shareholders.

This week, a Chinese court seized all the assets owned by Jia that it could unearth, and came up with just 1.3 million yuan. The China Securities Regulatory Commission has ordered Jia, now living in the U.S., to return to China. Even the local media acknowledge that the regulator has no power to enforce that order.

What's Leshi worth now? At its last traded price, it was valued at 4.9 times book. But as a typical technology company, much of Leshi's assets -- about 30 percent -- is in intangibles, often intellectual property such as know-how and patents, which could be worth nothing.

Leshi multiple to book when last traded

4.9x

This question has vexed many mainland fund managers. Back in 2015, Leshi was such a big name that mutual funds marched in; now, the likes of China Post & Capital Fund and China Southern Fund Management are stuck.

For example, the 1.1 billion-yuan China Post Core Competence Flexible Allocation Mixed Fund still counts Leshi as its second-largest holding, at 10 percent. Because of the eight-month halt, the manager had to write down that stake repeatedly, estimating in November that Leshi was worth 3.92 yuan a share, 25 percent of the last traded price. No surprise, the fund has slumped 29 percent in 2017.

This brings us back to the Shenzhen market: Stocks listed there provide little or no protection. The Shenzhen Composite Index is still valued at 3.1 times book, and that multiple is likely to be a lot higher based on tangible book only.

By comparison, despite this year's rally, the Beautiful 50 are trading at just 1.5 times book. More importantly, most of those companies are state-owned. If something goes wrong, the biggest shareholder -- the Chinese government -- won't play the catch-me-if-you-can game we're seeing with Jia. 

How times have changed. For years, Shenzhen was the destination. Now investors prefer the SOE-laden Shanghai market. Some might count it an achievement that Jia has sent retail investors back to the embrace of the state.

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

Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

To contact the author of this story: Shuli Ren in Hong Kong at sren38@bloomberg.net.

To contact the editor responsible for this story: Paul Sillitoe at psillitoe@bloomberg.net.

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