What happened

Market reports about delayed payments to suppliers and cash shortages have raised market concerns over Leshi’sfinancials. The company organized a press conference to communicate with investors about recent conditions andfuture strategies. On November 11th, Leshi announced that ten core management members planned to purchase nofewer than Rmb300mn shares of Leshi in the coming six months based on confidence in corporate outlook and fairjudgment of the share price.

Comments

Active efforts to address funding bottleneck. Although Leshi’s aggressive expansion has weighed oncash flow, its core business remains intact. We believe the market may have exaggerated the crisis because: 1）the listco’s operation has maintained sound growth; 2） it is actively seeking refinancing through multiple channels; 3）the interests of suppliers and Leshi are aligned and their risks shared; and 4） the promise by ten core management staffto increase stakes displays confidence in the long-term outlook.

Healthy and improving business operation; excellent performance from Leshi ecosystem. LeTV Group’srevenue may rise 150% YoY to Rmb50bn in 2016, and Leshi’s 1~3Q16 operating revenue doubled YoY to Rmb16.8bn. Itmade breakthroughs in its three main businesses （content, terminals and cloud）。 Notably, le.com became a top-4player; LeTV’s annual sales have approached 6mn units and it led in sales volume on Single’s Day 2016. LePhone’s salesvolume has hit a record 17mn units, laying a strong user foundation. Concentrating around terminal users, Leshi’s sevenecosystems are taking shape with a strong user base, platform synergy and product operation. As monetizationstrengthens in advertisement, video and games, we see broad profitability upside ahead.

To adjust strategy and shift from aggressive expansion to solid operation, conducive to sustainabledevelopment in the long term. According to Leshi’s plan, its global ecosystem development would come to atemporary halt, and its strategic focus would shift to shoring up existing business and scaling up operating cash flow.

Detailed measures may include: 1） improving supply chain and promoting construction of O2O proprietary marketingsystem; 2） cutting spending to ensure positive and fast operating cash flow growth and enhance monetization; 3）organizational reform to streamline organizational structure, performance assessment and new employee training.

Leshi remains the bellwether in innovation and strategic deployment in the A-share market. We expect2016/17e net profit to rise 38.9% and 47.2% YoY to Rmb796mn and Rmb1.172bn. Maintain BUY.

Risks

Hardware sales and financing miss expectations.