Hazards of Investing in Chinese Stocks

LeTV is a popular company that in any other country would be a great investment. In China, the company lacks the proper licenses to expand and the government could shut them down tomorrow, or more likely make it harder to compete against state-owned media. How do you price that risk into shares?

Caixin: Despite Stock Market Rout, Investors Still Love LeTV
In early July, the value of LeTV's Shenzhen-traded shares was 88.6 billion yuan, up more than 100 percent from last year. The company's market cap peaked on May 12 at 150.7 billion yuan. Letv.com has outperformed many rivals in the stock market, including Youku Tudou Inc., which is valued at around 19 billion yuan on the New York Stock Exchange.

Analysts say they are excited about LeTV's future. Huatai Securities predicts that its revenue will reach 20 billion yuan this year and 38 billion yuan in 2016. The company's market cap is expected to rise to as much as 270 billion yuan next year. Galaxy Securities has even forecast that the figure will hit 250 billion yuan by the end of this year.

Investors are betting on the company's business strategy, which is intended to create an integrated business chain that includes online video sharing, content production, mobile applications and device production. The company's moves to expand into sports, automobile computer systems and cloud computing have also been warmly received by the market.
Another unfocused company.
LeTV's Internet TV business has been under something of a shadow because it lacks a license for it to provide Internet content on TV sets. In July last year, the State Administration of Press, Publication, Radio, Film and Television, the media watchdog, tightened control of video content streaming into living room TVs, forcing LeTV to halt the sales of its set-top box and make changes to its Super TV.

LeTV has been working to get a license to revive its Internet TV business. The company has been negotiating with Huawen Media Investment Corp., a company controlled by state broadcaster China Radio International (CRI), about possible cooperation since October, a person close to LeTV said.

The deal being discussed includes LeTV making a 1.6 billion yuan investment in Huawen and its parent, Global Broadcasting Media Group (GMG), an investment subsidiary of CRI, the person said. This would provide LeTV access to the Internet TV license that CRI holds. "Jia is willing to pay 1.6 billion yuan for the license," said a source close to the negotiations.

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