Bottom line: iQiyi's issue of convertible notes to raise its latest $1.5 billion shows it continues to post big losses, and investors are increasingly skeptical that it can become profitable in the next 2 years.

It seems no one is quite ready to believe that China's cash-burning online video sites are ready for the profit column just yet. That seems to be the message coming from Baidu-backed (Nasdaq: BIDU) iQiyi, one of the leading players, which has just raised a fresh $1.5 billion via a convertible note issue. That would indicate that investors are hoping they can convert their notes into iQiyi stock when they come due, but can also simply collect back their money with interest instead.

There was a time not long ago when video sites like iQiyi, Alibaba-owned (NYSE: BABA) Youku Tudou and LeEco (Shenzhen: 300104) wouldn't have dreamed of issuing this kind of note, and instead would have raised money simply by offering equity to investors. But those days may be in the history books, as all the big players struggle for the elusive formula for sustainable profits.

iQiyi's CEO previously told me the company could become profitable as early as 2018, though perhaps this new bond offer would indicate that date has been pushed back. iQiyi was also reportedly eyeing an IPO as soon as this year, though again, this particular fund raising might indicate that plan has also been delayed.

All that said, let's zoom in on the news that has iQiyi saying it recently completed the funding that raised $1.53 billion from a group of Chinese investors. (English article) Leading that group was Baidu itself, which already holds a majority stake in iQiyi and has now pumped another $300 million into the unit by buying convertible notes.

Others taking part in the round included Hillhouse Capital, Boyu Capital, Run Liang Tai Fund, IDG Capital, Everbright-IDG Industrial Fund and Sequoia Capital. Thus it appears that each of those contributed about $200 million, which isn't a small amount. But it's noteworthy that so many investors were needed for the latest fund-raising, indicating no one is too bullish on this particular investment anymore.

iQiyi said it will use the money to upgrade its IP ecosystem and accelerate its IP-related businesses, especially its subscription business. There's no word on when the notes will mature, but I expect it's probably a relatively short period, perhaps 2 or 3 years. That would roughly coincide with a potential IPO, which would allow the investors to convert their notes to iQiyi IPO shares if the company looks attractive by then. Conversely, if the company is still in the red at the time of an IPO, money raised from a listing could be used to pay back these particular investors.

Money Losers

The bigger picture is that we don't really know how badly these companies are losing money, since none is publicly traded and thus they don't release financials. The only one that's sort of public is LeEco, and any China watchers will know that company is currently in the midst of a major cash-crunch, though not really due to its online video business.

The other big picture is that Baidu wants desperately to unload iQiyi from its books, since the unit is creating a big drag on Baidu's own profits. Baidu has been under shareholder pressure for more than a year to get rid of many of its non-core businesses, nearly all of which are quite large and losing money. It previously unloaded its Qunar (Nasdaq: QUNR) online travel business, and reports last week indicated that it might be preparing for major changes at its Nuomi group buying unit. (previous post) 

Baidu actually did try to unload iQiyi a couple of years ago by selling it to a group of investors including Baidu founder Robin Li. But that deal collapsed after Baidu shareholders complained that the deal undervalued iQiyi. Perhaps those same investors who scuttled the deal are regretting their decision now, as iQiyi continues to drag on Baidu's results despite its position as a leader in the online video space.

At the end of the day, it's probably too early to write off iQiyi just yet. That's really the message coming through with this latest fund-raising, since clearly the investors are still positive enough that they were willing to buy convertible notes instead of simple bonds with no convertibility. Still, the fact that investors are hedging their bets now means that skepticism is building towards these online video companies, and is likely to keep growing until one or more can show a formula for sustainable profits.