Billionaire’s plan to beat Tesla has a Vegas problem

Faraday Future Inc. FFZero1 concept vehicle

Jia Yueting has all the trappings of a successful Chinese tech entrepreneur with global ambitions.
A self-made billionaire who got his start as the IT guy at his local tax bureau, Jia’s flagship internet-video company now sports a USD15 billion market capitalization and a buy rating from Goldman Sachs Group Inc. Donning hoodies and t-shirts, he boasts of plans to take on Apple Inc. in smartphones and surpass Tesla Motors Inc. in electric cars. Jia’s Faraday Future has lured staff from Ferrari and BMW, and won the backing of Nevada’s governor to construct a $1 billion auto plant in North Las Vegas – about 400 miles from where Tesla broke ground on a giant battery factory in 2014.
Yet for all of Jia’s accomplishments, the 43-year-old tycoon has failed to win the confidence of one key man. Dan Schwartz, Nevada’s treasurer, says he’s skeptical Jia can secure financing for the car plant, a project that needs government support for power lines, water mains and roads. Schwartz, the former CEO of a private-equity research firm in Hong Kong, wants more transparency on the funding before signing off on state bonds for $120 million of infrastructure improvements.
The crux of Schwartz’s concern is Jia’s reliance on equity-
backed loans, a financing strategy that could leave Nevada taxpayers vulnerable to the whims of China’s volatile stock market. Jia has pledged 87 percent of his holdings in Leshi Internet Information & Technology Corp. – his flagship firm – for cash that he then plowed back into his companies, regulatory filings show. The stock, which was halted in Shenzhen for the first five months of 2016, has dropped 11 percent since it resumed trading on June 3, a move that heightens Schwartz’s fear that a margin call could prevent Jia from funding the plant.
“You can see where this leads,” Schwartz said in a phone interview. “His Internet company is successful, but that doesn’t generate the billions of dollars he’d need. Where’s he going to get the money?’’
The financing questions surrounding Jia’s foray into the U.S. electric-car market are becoming more common around the world as China Inc. embarks on an unprecedented overseas shopping spree. The nation’s firms, which boosted outbound direct investment by 62 percent in January-May from a year earlier, are branching out even as rising debt levels and weak profits at home cast doubt over their ability to secure stable funding.
Faraday, whose 1,000-horsepower concept car has drawn comparisons to the Batmobile, says it has the full support of Nevada’s governor and is pushing forward with the city of North Las Vegas on infrastructure planning. The 800-employee carmaker – a separate company from Leshi that’s majority-owned by Jia – has sought to address Schwartz’s concerns, but could “technically” build the plant without the state bonds, Faraday spokeswoman Stacy Morris said in an e-mailed reply to questions.
Jia has invested more than $300 million of his own money into Faraday and the firm will announce a round of outside funding within weeks, said Winston Cheng, a former Bank of America Corp. investment banker who now runs corporate finance for Jia’s companies. He said the size of the funding would be “meaningful” and come from Asian investors, while declining to provide more details.
“I don’t understand why he’s trying to kill these high end jobs in the state of California and Nevada,” Cheng said in an interview, referring to Schwartz. “It baffles me.”
City, county and regional government agencies are already working with Faraday on infrastructure for the plant, and the Nevada Governor’s Office of Economic Development has approved funding for worker training, the GOED said in an e-mailed response to questions from Bloomberg. Tesla – which is named, like Faraday, after a 19th century pioneer in the field of electricity – declined to comment.
Leshi, the publicly-traded centerpiece of Jia’s empire, shows few signs of financial distress. Profits increased 20 percent in the first quarter, while its quick ratio, a gauge of the firm’s ability to meet obligations over the coming year, is in line with the median for Chinese companies as a whole, according to data compiled by Bloomberg. Leshi’s Altman Z score, a measure of bankruptcy risk, suggests trouble is unlikely.
Analysts are bullish on the stock, with 9 of 11 forecasters tracked by Bloomberg giving it the equivalent of a buy rating. Goldman Sachs issued a price target of 70.22 yuan on June 22, or 35 percent above its Monday close. The bank declined a request to interview its Leshi analyst.
Investors are less sanguine, with Leshi shares sinking for six straight days after they resumed trading last month. At 105 times projected earnings for this year, the stock is more than twice as expensive as the median China-listed company. The firm has recorded negative cash flow for the past two quarters, data compiled by Bloomberg show.
“It’s a matter of time before problems emerge,” said Wang Zheng, the Shanghai-based chief investment officer at Jingxi Investment Management Co., which oversees about $300 million and is avoiding Leshi shares in part because of concerns over its financing strategy. The company’s high valuation reflects the appeal of “concept” stocks among Chinese individual investors, Wang said.
Jia and his family have pledged about $5 billion of Leshi shares as collateral for loans, amounting to a 35 percent stake, according to data compiled by Bloomberg from the company’s first-quarter report. Jia also sold 2.5 billion yuan ($375 million) of Leshi shares in June 2015 and lent the proceeds back to Leshi to “relieve the company’s financing pressure.” He later entered into a contract with an asset management firm to exchange 100 million shares, or about 5.3 percent of the company, for cash that he then lent to Leshi interest-free. Jia pledged to repurchase the stake after Leshi repays the money.
“The company is capital strapped,” said Dai Ming, a money manager at Hengsheng Asset Management Co. in Shanghai.
For Schwartz, Jia and Faraday Future need to explain more clearly how they plan to provide stable financing for the Nevada project. Only then would he consider supporting a state debt sale to fund the plant’s infrastructure. He said it’s his role as treasurer to bring the bond before the state’s board of finance, whose chairman is the governor, for approval.
Schwartz, an elected member of the Republican party who took office in January 2015, dismissed the notion that his opposition to the Faraday project has anything to do with his political ambitions. He has clashed with the Republican governor before on budgetary issues, according to local media, amid speculation he could mount his own bid for governor.
“I may/may not run for governor, but this project has nothing to do with my political future,” Schwartz said in an e-mail. “It’s strictly about whether Faraday has the money/expertise to build a $1 billion electric car manufacturing facility in North Las Vegas. And, if they don’t, whether or not I want the Nevada taxpayer to pick up the tab.”  Bloomberg