GM - VinFast: Sell The Valuation Bubble

2023-08-15 20:46:53 ET

Summary

• VinFast, a Vietnamese electric vehicle maker, has completed its SPAC combination, and shares have surged to a sky-high valuation.
• The company is in the production ramp stage with limited volumes and lower price points, resulting in lower revenues compared to other EV players.
• VinFast's balance sheet is in poor shape, with limited cash and significant debt, and it will likely need a major capital raise for its growth plans.

A couple of weeks ago, I discussed the pending listing of upstart electric vehicle player VinFast Auto ( VFS ). The company was looking to enter the US stock market via a special purpose acquisition company ("SPAC"), which was waiting for shareholders to approve the combination. Now that the deal has gone through, shares have surged dramatically to a valuation that just doesn't make sense in today's market.

VinFast is an electric vehicle maker based in Vietnam, but it's looking to expand its global footprint. Its facilities in Southeast Asia have a maximum production capacity of 300,000 EVs per 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 a few weeks ago. The first phase of the US factory will have annual vehicle production capacity of 150,000 units, with production expected to start in 2025. The company also sells electric scooters and buses, but the main vehicle lineup can be seen below.

The company was previously a manufacturer of ICE vehicles, but is now transitioning to EVs. As such, it's currently in the production ramp stage with limited volumes. As detailed in the most recent filing , roughly 9,500 vehicles were delivered in Q2. That puts the company currently a bit less the volumes of both Rivian ( RIVN ) and Polestar ( PSNY ). However, VinFast's lower price points on a majority of those Q2 sales as compared to those other EV players means total revenues will likely be quite a bit less than the two other names.

There are a couple of things that worry me at the moment. The first is the company's balance sheet, which is in very poor shape. At the end of Q1 2023, VinFast only had $158 million in total cash, but it had total debt of nearly $2.6 billion. The electric vehicle space is a very capital intensive one, and the company is definitely going to need more funds to build out its US factory and other growth plans. Throw in the large losses we're currently seeing, and it wouldn't surprise me to see a major capital raise at some point.

My biggest worry for investors though today is valuation. As I mentioned previously, more than 2.3 billion shares were to be outstanding after the SPAC combination went through. Tuesday was VinFast's first trading day, and shares are more than triple where they were when I last covered the name. At Tuesday's closing price above $37 a share, that values the company at more than $87 billion. The chart below shows where that compares against numerous EV players in the space like Lucid ( LCID ), Ford ( F ), General Motors ( GM ), NIO ( NIO ), and the two names I discussed above. EV giant Tesla ( TSLA ) also has a more than $750 billion market cap, which is well above all of these names combined.

I mentioned previously that this was a very thinly traded name, so VinFast could see a lot of volatility. That has certainly been the case recently, which is why it's so hard to recommend shorting the name, and it likely would be very expensive to do so if you could get your hands on any shares. However, it seems crazy to me that the company at one point on Tuesday hit a high that gave it more than an $91 billion market cap. That's well above where Ford and General Motors are valued, and even though their EV businesses aren't doing tremendously currently, they have very profitable ICE segments that generate tons of cash flow.

To put the valuation argument another way, let's look at things on price to sales basis. If you take the average of Lucid, Polestar, NIO, and Rivian for their currently expected 2024 sales, the average P/S ratio comes in around 3.35. For VinFast to get to that P/S number, it would need more than $26 billion in revenues next year. Even at its maximum production capacity, the company has virtually no chance to get to that number given the sales prices of its current product lineup. If we take out Lucid's high P/S number that brings up the average of that four company group, VinFast would need almost $43 billion in revenues in 2024.

For me to change my recommendation on this name to a hold, I need to see a couple of things. First, I need to see the valuation come down to a more appropriate level, likely around the EV-only names and not just near the ICE giants. Second, I need to see the company generate a few quarters of meaningful revenues, where deliveries start ramping, so we can see how demand is truly faring. Finally, I need to see a significant capital infusion to fix the very strained balance sheet.

In the end, VinFast has now completed its SPAC combination, with Tuesday marking its first official day of trading. Shares of the company have more than tripled from the SPAC price I recently covered the name at, implying a sky high valuation that just doesn't fit right now. With the company having limited sales right now, losses are piling up and the balance sheet needs a lot of help. I previously mentioned selling this name into any strength we saw on the going public hype, which is where we find ourselves today.

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