Tencent Co-Founder Brands China's LeEco A "Ponzi Scheme"

LeEco CEO Jia Yueting - Getty H 2016
Courtesy of Getty Images

The struggling conglomerate's film studio co-produced Matt Damon's 'The Great Wall' and runs a joint venture headed by former Paramount president Adam Goodman, but it's now sucked up in the parent company's death spiral.

Struggling Chinese Internet conglomerate LeEco can now add "public ridicule" to its growing list of woes.

Last week, the cash-crunched technology firm founded by outspoken entrepreneur Jia Yueting became the subject of a formal review by Chinese regulators. Days later it was derided as nothing less than a Ponzi scheme by several of China's dominant tech tycoons.

"[LeEco] is obviously a Ponzi scheme — you don’t belong in the investment market or entrepreneurial world if you can’t see that," Tencent co-founder Zeng Liqing wrote in a widely shared social media post over the weekend. With a market capitalization of $351 billion, Tencent is Asia's most valuable company. 

Zeng's scathing critique, which was shared on Tencent's own WeChat social messaging service, was "liked" by none less than Xu Xiaping, one of China's most respected angel investors, and Tencent chairman Pony Ma, the world's 20th richest man ($33.5 billion, according to Forbes).

The latest public embarrassment for LeEco comes as the firm struggles against the downward momentum of a corporate death spiral.

Once dubbed the "Netflix of China," LeEco began a wild expansion from its core Internet video business about five years ago, burning through billions as it launched costly mobile phone and electric car divisions — among much else — in a bid to rival Apple and Tesla on the world stage. The conglomerate's film studio Le Vision Pictures, meanwhile, co-produced Matt Damon's big-budget Chinese spectacle The Great Wall and launched a Los Angeles-based subsidiary headed by former Paramount Pictures president Adam Goodman.

Nearly all of this expansion was fueled by deep borrowing, however, and Jia began to run out of rope last year, as revenues from the conglomerate's new ambitions were short in coming (for a more detailed look at LeEco's background and unraveling see here).

The company has been sustained by several sizable loans to cover the cash crunch — one for $600 million last November, and another for $2.2 billion in January from property company Sunac China (the same firm that is attempting to buy Wanda's theme park business). Many observers believe the cash infusions have done little but delay the inevitable, however.

Many of Jia's assets have been frozen by court orders as his creditors have protested late payments on loans. LeEco's core Internet video business, Leshi Internet Information & Technology Corp — among its very few assets that is still perceived as valuable — on Friday estimated losses of just under $100 million for the first half of 2017, compared to profits of about $42 million during the same period a year ago. On Tuesday morning, Leshi extended a months-long freeze in trading of its shares on the Shenzhen stock exchange. The company says it is embarking on a major asset restructuring as its attempts to cope with the deep financing difficulties of its parent company.