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Tencent co-founder brands LeEco a 'Ponzi scheme'

Jia Yueting, founder and CEO of LeTV speaks on the releasing conference of LeTV October 27, 2015 in Beijing, China.
VCG | Getty Images
Jia Yueting, founder and CEO of LeTV speaks on the releasing conference of LeTV October 27, 2015 in Beijing, China.

Embattled Chinese internet conglomerate LeEco has been branded a "Ponzi scheme" in an online comment made and endorsed by some of the country's leading lights in technology.

The debt-ridden group of technology companies founded by billionaire Jia Yueting declined to comment on the scathing critique posted by Tencent co-founder Zeng Liqing, and "liked" by the company's chairman Pony Ma Huating, and Xu Xiaoping, one of China's foremost angel investors.

"It [LeEco] is obviously a Ponzi scheme. You don't belong in the investment market or entrepreneurial world if you can't see that," wrote Zeng, co-founder and advisor emeritus at Tencent Holdings, one of the biggest tech companies in the world.

His damning appraisal was made at the weekend in a post on WeChat, Tencent's ubiquitous social media app. Ma and Xu later "liked" the post.

When contacted by the Post about Zeng's remark, Chen Xuanyi, a spokesman for LeEco, said the company had "no comment" to make.

The latest blow to LeEco – once a high-flying technology empire with a bright future – comes as it battles to stay afloat amid a mountain of debt, huge losses and court orders freezing its assets.

Its crisis has spilled into its Shenzhen-listed arm, Leshi Internet Information & Technology Corp, which said on Tuesday its shares will remain suspended for up to another three months.

In a statement to the bourse before market opening on Tuesday, Leshi said it was extending a freeze on share trading which has been in place since April. It said it plans to push forward with a "major asset restructuring plan", which could pave the way for the injection of LeEco's film production affiliate, Le Vision Pictures, into the listed Leshi business.

But some analysts felt the challenges facing Leshi and its parent is too big and wide-ranging to be averted by the restructuring cited in the statement.

"It doesn't matter whether or not Le Vision Pictures can be injected into Leshi in the end. What matters most is how Leshi can turn around its business, which is making big losses, and how it can regain momentum, given all the bad news regarding LeEco," said Hu Jiaming, a Shanghai-based analyst with Capital Securities.

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Leshi estimated its first-half losses in 2017 at between 636.7 million yuan (US$94.2 million) and 641.7 million yuan, a dramatic swing from profit of 284.4 million yuan in the same period a year ago, according to a filing on Friday to the Shenzhen stock exchange. The company attributed the loss to declines in customer loyalty, advertising revenue, terminal sales and membership fees.

Leshi's trading has been suspended since April 17. The extension of that freeze is expected to buy Leshi some time to cope with the unprecedented challenges facing its cash-strapped parent company.

Having started out as a Netflix-style video streaming service, the Beijing-based LeEco later positioned itself as an Apple slayer and Tesla challenger by making expensive forays into manufacturing smartphones and televisions, and electric car development. But the rapid expansion soon began to drown the company in debt.

Many of Jia's assets have been frozen by court orders as creditors encountered difficulties in getting their money back.

However, not everyone agrees with Zeng's assessment of how the company operates. In response to the Ponzi scheme accusation, Sun Hongbin, chairman of Sunac China, who poured in 15 billion yuan to bail out Jia's LeEco, urged the public to be more tolerant towards "failure".

"Jia is still young," he said on Sunday in a WeChat post. "We should support the entrepreneurial spirit [of Jia]."

Sun, along with Leshi CEO Liang Jun, and the CEO of LeEco's movie arm, Zhang Zhao, were installed as the new directors in Leshi's boardroom by shareholders at a meeting on Monday after Jia resigned as chairman in early July.

Leshi is due to choose its new chairman on Thursday. There is high expectation that Sun will replace Jia in that role, but he told mainland media on Tuesday that he has little interest in the position.

"They [Leshi] are a small business, while Sunac is a big business worth hundreds of billions yuan," he was quoted as saying by sina.com.