How LeEco embezzlement reflects pitfalls in cash management

The founder and CEO of ride-sharing company Yidao Yongche, Hang Zhou, has accused one of its major shareholders, LeEco, of misappropriating 1.3 billion yuan since Yidao Yongche became its subsidiary in 2015. Zhou’s recent statement also highlighted the cash management challenges that face aggressively expanding corporates.

LeEco, a technology conglomerate, had been running short of cash for several months, according to Yidao. Yidao, was also reportedly unable to return cash deposits to its customers and drivers due to a shortage of cash.

According to Zhou, LeEco embezzled Yidao’s cash “for well-known reasons” and it “victimized” Yidao. However, in the statement from LeEco’s CEO Yueting Jia, Jia claimed LeEco was free of blame, and had “allocated the cash appropriately between the different unlisted companies.”

Moral hazard usually occurs when investors are not aware of the actual investment actions of issuers, especially when the corporate CEO and chairman is a same person, who is also authorized to access and allocate the funds freely without being closely monitored. In the case of LeEco, Jia Yueting, the CEO and chairman, consistently allocated funds to an electric car business, an unprofitable business line of LeEco, that Jia insisted in exploring and investing in.

Back in Q4 2016, several of LeEco’s suppliers claimed overdue receivables amounting to over 50 billion yuan from the technology rising star. As a result, LeEco cut thousands of jobs in a bid to shrink its business as well as to save costs.

Last November, LeEco raised 1.4 billion yuan through bank loans on behalf of Yidao. Yidao believed they should receive 1.3 billion of the total, but LeEco only promised that 100 million yuan will be spent on Yidao. However, a source says that LeEco misappropriated the 1.3 billion yuan to pay back its existing liability, and that Yidao did not receive a cent.

It is not the first time where LeEco was accused of misappropriating its internal cash, funded either by banks or external cash from deposits of its customers preordering smart TVs, mobile phones and electric cars. Its aggressive business expansion strategy created a huge burden on the cash flow of the conglomerate.

Currently, the stock of Leshi Internet Information & Technology Corp, a subsidiary of LeEco listed on the Shenzhen stock exchange, is still suspended and its stock price has dropped 25% since the beginning of 2017.