PSNY - Black Spade Acquisition Co: Sell The VinFast Listing

2023-08-01 10:17:21 ET

Summary

• VinFast, a Vietnamese electric vehicle maker, is set to go public through a SPAC deal worth $27 billion.
• The company recently broke ground on its U.S. facility, but vehicle production won't start until 2025.
• VinFast's challenges include a weak balance sheet, large losses, and intense competition in the EV market.

One of the hottest areas in the market over the past couple of years has been the electric vehicle space. The dramatic rise in Tesla ( TSLA ) shares has sent investors looking for the next big winner as consumers shift to more environmentally friendly transportation options. However, most names that have gone public recently have ended up seeing major losses for their shareholders. Another emerging EV player is about to start trading publicly when its special purpose acquisition company ("SPAC") deal is finalized, and it could be the latest one to have a rough road ahead.

VinFast is an electric vehicle maker based in Vietnam, but it is looking to expand its global footprint. Its facilities in Southeast Asia have a maximum production capacity of 300,000 EVs per year. In May, the company announced that it would hit the U.S. stock market through a combination with SPAC Black Spade Acquisition Co ( BSAQ ) worth roughly $27 billion (equity value of more than $23 billion). Last Friday, a major step in the process was hit when the SEC approved the registration form for the proposed listing. Black Spade has a general shareholder meeting coming up on August 10th to approve the business combination. After this date, if the deal is approved, we should have a better idea of when the SPAC will fully transition to VinFast on the exchange.

The VF 8 is a 5-seater that has an EPA estimated range of 264 miles and starts at $46,000 in the United States. For the moment, the company will have some of a pricing disadvantage against competitors who do benefit currently from federal U.S. EV tax credits, at least until it can get U.S. production going. Right now, only customers in California can order one. You can see a couple of other variants on their site . The VF 9 is a large 7 seat SUV, and while full specs like range have not been finalized yet, it is expected to start at $83,000. The company also has a couple other vehicles coming to market , as well as a smaller SUV only available in Vietnam currently.

VinFast fully phased out production of ICE vehicles in late 2022 in connection with its strategic decision to transform into an EV-only company. Like many startup electric vehicle companies, VinFast does not have the best of balance sheets currently. As the graphic below shows, cash at the end of March was less than $160 million, but the company had almost $1.75 billion of loans and borrowings. The company is likely to need additional capital over time, especially as it looks to start U.S. based production of its vehicles.

The company started selling its vehicles in its home market in late 2021, and it has worked on exporting its VF8 SUV to the U.S. and other countries since. The company has met some delays due to software issues, but deliveries in the U.S. did start earlier this year. The next major phase in the process is the building of a plant in the US, which the company broke ground on in North Carolina last week. The first phase of the process will have annual vehicle production capacity of 150,000 units, with production expected to start in 2025. This should also help margins as the company sees economies of scale kick in with more material volumes, and there might be some improvement in margins from not having to import vehicles thanks to localized production. It remains to be seen if the company will qualify for any additional benefits from the Inflation Reduction Act, which would help reduce costs. However, that's something to discuss once the U.S. factory is close to actual production when we get more details on vehicle part sourcing and other items.

The transition from ICE vehicles to EVs has resulted in a big revenue drop recently as you might expect. This is due to reduced manufacturing as the company works to ramp its EV offerings, but the top line should increase as production levels improve in the coming years. As the income statement below shows, total revenues fell off a bit in 2022, but the year over year drop from Q1 2022 to Q1 2023 was much larger. With such a small revenue base currently, the company is losing a lot of money. We've seen other startups like Lucid ( LCID ), Fisker ( FSR ), Rivian ( RIVN ), and Polestar ( PSNY ) also lose large sums of money as they try to get to volume production of their respective vehicles.

The thing that worries me most here is valuation. With over 2.3 billion shares to be outstanding after the combination, the company's implied valuation would be almost $29 billion based on Monday's rally. That's up almost $6 billion since the deal was announced in May, with the recent rally certainly helping a bit. That essentially values the company at a level that's about $3 billion more than Rivian, and nearly 70% above Lucid, yet VinFast has a fraction of the deliveries and revenues currently. Major delivery growth in the U.S. won't take place for at least another two years, and this is a very competitive market the company is trying to make a name for itself in.

I could easily see a scenario where the stock drops over time, like we saw with Rivian, Lucid, Polestar, etc., as investors digest large losses and cash burn. More equity offerings could also be needed, potentially diluting investors even further down the road. However, I would caution against shorting in the near term, just because this SPAC is thinly traded, so the stock could be volatile, and there might be some bullishness if the merger is fully approved. However, I would certainly sell into strength, as the valuation just doesn't work for me here.

In the end, Black Spade Acquisition Co hit a major milestone for its proposed combination with VinFast last week as SEC registration forms were deemed effective. Assuming shareholders approve the deal, VinFast will soon trade on its own rather shortly. The company will try to deliver hundreds of thousands of electric vehicles per year in a few years, but like we've seen with other startups, there likely will be many bumps in the road. With a currently implied valuation above that of Rivian, I'd be a seller of these shares here or on any further rally as we approach the combination, at least until this company gets some decent results under its belt.

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