VinFast Auto Ltd

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 1/5

VinFast Auto Ltd. is a Vietnamese electric vehicle manufacturer aiming to establish a global presence. They develop and manufacture a range of electric vehicles, including cars, e-scooters, and e-buses, and are in the process of building out their own charging infrastructure as well.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

VinFast is a vertically integrated manufacturer of electric vehicles headquartered in Vietnam, with a growing global ambition.

VinFast operates in a capital-intensive industry that requires significant investment in manufacturing facilities, research & development, and sales/distribution. The company is structured into two core business segments, Automotive, and Parts and Aftermarket service.

  • Automotive: This segment includes the design, development, and manufacturing of electric vehicles.
    • VinFast’s portfolio comprises various electric vehicles (EVs), including electric cars such as SUVs and hatchbacks, electric buses, and electric scooters. Key vehicle models include VF8, VF9, and VF e34.
    • VinFast is investing heavily in new production facilities in Vietnam and the U.S. It is also looking to create strategic partnerships around the globe with manufacturers and parts suppliers.
  • Parts and Aftermarket: This unit focuses on the distribution and production of auto-parts, as well as repair and maintenance of all of their vehicles.

Revenue Distribution

  • Geographic Diversification: VinFast’s initial revenues were primarily derived from the domestic Vietnamese market. However, they are now pushing aggressively to establish a market in the U.S, Canada, Europe, and other parts of the world. The shift towards global markets is a critical aspect of their strategy. The company does not breakdown revenue by geographic region in its financial statements.

  • Sales Mix: Sales are primarily of Electric vehicles, in the latest reports about 80% of revenue is coming from vehicle sales, however, in previous years majority of revenue was from parts and components. We don’t have visibility into the sales mix between the different types of vehicles, such as SUV’s vs EV-Buses.

VinFast’s strategy is to expand rapidly and establish itself as a global EV brand, competing in multiple markets.

  • Demand for Electric Vehicles: VinFast operates in a sector that is experiencing significant tailwinds from consumer-preference towards zero-emission vehicles.
  • Competition: The electric vehicle market has become crowded with both legacy and new players. There is cut-throat competition and price wars in this segment.
  • Technological Advancement: Battery technology is continuously improving. Automakers are heavily focused on enhancing driving ranges, charging speeds, and energy density.
  • Regulatory Requirements: Governments around the globe are incentivizing the purchase of electric vehicles. There have also been stricter emissions regulations for gas-powered vehicles.

Competitive Landscape

VinFast faces a crowded and competitive electric vehicles market. Some of its major competitors include:

  • Tesla: The leading global EV seller and manufacturer. They have a strong brand name and established production processes.
  • Legacy Automakers: Traditional automakers, like Toyota, VW, GM, etc., are also producing new electric vehicles. These players have large customer bases and expansive manufacturing capabilities.
  • Emerging EV Manufacturers: Numerous startups that are focused on the EV industry are also vying for a position in the market. These startups tend to be more agile and innovative in some areas.

VinFast faces significant competition and will need strong differentiation in order to stand out.

What Makes VinFast Different?

  • Vertical Integration: VinFast’s manufacturing and assembly capabilities are all done in-house. This approach enables it to control cost and quality. It also means they are relying less on other companies to supply parts.
  • Brand-focused Approach: The management has emphasized that their goal is to be a global brand. They are trying to build a culture around the company, focusing on luxury design and premium feel. This brand is meant to be a major differentiator in the EV market, which tends to be cost-competitive.
  • Rapid Expansion: The company has demonstrated a desire to grow very quickly and establish a global foothold. VinFast has opened showrooms and production facilities at a rapid pace. This has the potential to allow it to have first-mover advantage in some emerging markets.
  • Vietnamese heritage: VinFast intends to tap into the growing demand for Vietnamese made products both at home and in the global markets.

Financials

VinFast’s financials present a picture of a company in its early stages of operation with high spending on research and development and infrastructure development.

  • Revenue Growth: VinFast has seen a significant increase in its sales numbers, especially from its automotive division, however, the increase in sales comes alongside ballooning losses.
  • Operating Margins: Operating margins remain very poor, and even negative when we add back depreciation and amortization. Much of this is due to the start-up nature of the company, and the company has admitted that some of its previous contracts weren’t profitable. The profitability should increase as the new contracts start generating revenue.
  • Profitability: VinFast has a long history of posting losses, and these losses do not show any signs of slowing down, even though revenues are growing. This indicates that the business is struggling to achieve economies of scale and is spending too much.
  • Capital Expenditures: The company is spending a substantial amount of money on capital expenditures, such as building new factories, research facilities, and showrooms. Even in recent reports, they say they will spend approximately 10 billion dollars on capital expenditure.

VinFast’s financials reveal a company that is losing money at a significant clip while also rapidly expanding its operations and facing significant competition.

Moat Rating: 2/5

VinFast has several characteristics that might help it to gain a wide economic moat.

  • Intangible Assets (Brand): VinFast’s focus on branding, particularly with a luxury feel and quality design, could become an important moat if the brand becomes well-known and if they can sell their vehicles at a premium.
  • Network Effect: Not directly applicable to the automobile industry, but their own charging network could provide a small network effect to its own vehicles.

However, the company also lacks key characteristics for a strong moat.

  • Switching costs: Since cars and other EVs are commodities, there are no real switching costs.
  • Cost Advantages: As a new company, VinFast’s cost structure is still evolving. At this moment it is unlikely that it has any kind of meaningful scale advantage. This is further undermined because production is not currently optimized.
  • Innovation: At the moment, VinFast is dependent on current technology and design, so they do not have any edge in innovation.

The fact that their financial results are far below the average in the sector, shows that while their idea has merit, they are still far away from having an advantage in their business model. These factors contribute to a narrow moat rating of 2 out of 5.

VinFast is still in its early stages, and a lot of its potential depends on things the company is still actively developing.

Risks to the Moat and Business Resilience

  • Intense Competition: The EV market is intensely competitive, and VinFast is competing with both well-funded legacy players and agile startups. They will need a distinct advantage to survive.
  • Technological Disruption: The rapidly changing technology of the EV sector makes established companies vulnerable to newer firms. Even with patents and unique technology, there is no telling what advancements could make them redundant.
  • Brand Building: VinFast will have to make large investments in marketing and branding to build a global brand. They will need to contend with established brands like Tesla, BMW, etc.
  • High Capital Requirements: VinFast’s business plan needs large capital investments, meaning they are vulnerable to any external risks. They could run into trouble if they are unable to acquire capital.
  • Execution Risk: Building a company from scratch and trying to establish a global brand, especially in the auto industry, is an extremely complex and difficult task. VinFast can falter on many fronts.
  • Macroeconomic Factors: A global recession could severely impact sales of a consumer discretionary product, such as an EV. High inflation will also limit the discretionary income of consumers, reducing the demand for cars.
  • China: China is the largest EV market in the world and Chinese automakers have created impressive cars that tend to be cheaper than Western cars. These Chinese automakers are actively looking to establish their presence in different markets, including VinFast’s, giving them a natural advantage over them due to lower prices and a “home” advantage.
  • Supply Chain Issues: Ongoing issues related to supply chains may affect production. VinFast will have to ensure that it has multiple suppliers in different geographies, so it does not get hurt in the long run.

Understandability: 3 / 5

VinFast’s business model, although novel, is relatively easy to understand. They manufacture EVs, and they are expanding their brand globally. Some key value drivers are ROIC, growth, and margins. These concepts are simple and straightforward. But the complexity is that they are doing all of this in a rapidly changing environment and are relatively new to the sector. The future is very uncertain, so investors would need to be willing to keep track of the company in the long term. This makes it a bit above average on the difficulty scale for most investors. This makes it a 3 out of 5 for understandability.

Balance Sheet Health: 1 / 5

VinFast’s balance sheet presents several concerns.

  • High Debt Levels: The company has a large debt load with a significant portion of that being short-term debt. This increases the risk profile of the company significantly.
  • Low Liquidity: The company does not seem to have enough liquid assets. It has a large amount of cash, but most of it is being spent to expand operations.
  • Negative Equity: VinFast has negative shareholder equity, which indicates that its debt is significantly higher than the value of its assets.
  • Losses: The company is unprofitable and the losses have been increasing rapidly year after year, including a huge increase in 2022.

This makes their balance sheet very risky. Their finances are stretched, and they are unable to generate profits to support the business. It’s a 1 out of 5 for balance sheet health.

Recent Concerns/Controversies and Problems

  • SEC Investigation: Recently, VinFast received a subpoena from the SEC and they are cooperating fully. This shows an inquiry into the business.
  • Supply Chain Issues: VinFast is highly reliant on the global supply chain to create its vehicles. Disruptions can severely impact the company’s financial performance. It has mentioned in their SEC filings that they are having difficulty getting components from multiple suppliers.
  • Lack of Profitability: VinFast is still a fairly new company, so they have not turned a profit so far. They have mentioned that the losses are expected to continue in the short term.
  • High Cost of Sales: A significant portion of VinFast’s expenses comes from production costs. As their costs are greater than their revenues, it is important that they need to bring their costs down in order to become profitable.
  • Limited Market Acceptance: VinFast is still trying to prove its EV technologies and build its brand. They might not be able to gain a significant footing in markets like Europe or the U.S where consumer preferences and competition are already high.
  • Management Turnover: While not a controversy or problem, VinFast has been restructuring itself and it has had several key employees leave the company. They have not been able to get a strong management team in place.

VinFast’s latest results and updates show the many challenges it faces, including high competition, significant losses, and execution challenges.