Funding Thesis

Having skipped the anticipated wild journey shortly after its US inventory market debut, I’m lastly prepared to start out taking a look at VinFast (NASDAQ:VFS) inventory. It’s at present down about 85% from its highs, however that by itself is rarely a purpose to suppose {that a} inventory is a cut price. A number of components make VinFast maybe a long-shot funding however with some potential benefits relative to different startup EV makers. A few of these benefits embody maybe some points that few might have thought of, resembling a possible geopolitical edge. For example, whereas EV makers that decision both China or the US-led Developed World alliance their house face having the opposite aspect’s market restricted to their automobiles, Vietnam and by extension VinFast are sitting fairly, probably with the ability to entry all main markets, with few limitations, since nobody desires to alienate a rising impartial center energy nation in Asia, thus achieve a brand new potential enemy.

There are after all additionally limitless potential pitfalls alongside the best way, together with dangers associated to the execution of its enlargement in international markets, questions concerning the high quality of its automobiles, in addition to EV market dangers, with rising indicators that we could also be getting near the purpose the place EV adoption might decelerate dramatically, at the same time as the worldwide automotive trade retains ramping up EV manufacturing. That is subsequently a extremely speculative funding alternative, and I intend to deal with it as such, as a part of my general portfolio.

VinFast sees respectable development in revenues, and it’s seeking to develop into main markets

For the second quarter of this yr, VinFast noticed a major improve in revenues to $334 million, up from $145 million for a similar quarter from a yr earlier. Its quarterly internet loss has been roughly regular at $527 million, versus a lack of $574 million for the second quarter of final yr. Whilst its R&D prices are declining it’s incurring larger prices on account of its efforts to scale up manufacturing and gross sales. Capital expenditures elevated from $131 million in Q2, 2022, to $341 million for a similar quarter of this yr.

The explanation why it must spend way more on capital prices is as a result of it’s investing in an meeting plant in North Carolina, which is ready to finally produce 150,000 items/yr. Studies that it additionally desires to enter the EU market recommend that we’ll see a major want for money for the foreseeable future, which implies most likely extra debt and inventory dilution to finance all of it. This section will most likely final for years, with regular earnings, if the corporate will ever attain that stage, which is a actuality that we’ll solely attain in a really distant future. Within the meantime, no matter its general trajectory by way of inventory value, this will likely be a wild rollercoaster journey for traders.

Geopolitical realities could also be VinFast’s biggest benefit over EV friends

Only in the near past, The EU introduced that it intends to analyze China’s EV trade over unfair subsidies, no matter which will imply inside the context of most main economies being engaged in lending assist to their home EV trade. The US & China are more likely to mutually undermine one another on this respect as properly. There are even grounds for the US & the EU to come back to blows. Such is the character of nice powers’ financial competitors that we see unfolding earlier than us.

Inside this context, Vietnam finds itself in what I see as a geopolitical candy spot. It has sturdy financial ties with the US, China, and the EU, however it’s not allied with any of them and it efficiently managed to keep away from getting sucked into any alliance in opposition to different powers. It’s considerably just like India’s non-aligned place, the place nobody desires to antagonize them an excessive amount of for concern of pushing them into the opposite camp. We’re going by way of a section within the international nice energy competitors recreation, the place international locations that also train a sure extent of sovereignty and independence have a substantial amount of leverage. What this implies for Vietnam’s VinFast is that it’s unlikely to be met with related ranges of hostility.

It’d even be the case that VinFast will likely be met with favorable circumstances as a manner to attract Vietnam into one of many opposing camps. In different phrases, whereas a lot of the automakers are caught within the crosshairs of different main financial powers, VinFast would possibly profit from the geopolitical want to tie a center energy like Vietnam in Asia to at least one camp or one other economically.

The worldwide EV market would possibly face an oversupply concern, on account of excessive manufacturing development, and slowing gross sales development, making VinFast’s timing for enlargement lower than perfect

Not all of the exterior components affecting VinFast’s future outlook are essentially vivid.

As we will see, international EV gross sales development continues to be sturdy. On the face of it, VinFast is coming into a booming market. Taking a step again, holding in thoughts that a lot of the worldwide automotive trade is transitioning to largely producing EVs, gross sales development is arguably lagging what could be wanted to rework most international standard automotive gross sales into EV gross sales.

World automotive gross sales are round 70 million items per yr. As we will see, this yr it could be on tempo to promote about 10 million EVs, which is spectacular. Primarily based on some very current stories, nonetheless, there may be beginning to be an EV stock overhang, as EV makers are actually producing extra EVs than there are consumers, a minimum of within the US. This in my opinion exhibits that we’re beginning to attain the purpose the place we’re operating out of potential consumers who’re prepared to offer EVs an opportunity, most certainly as a result of for them, it doesn’t meet their wants. VinFast desires to provide and promote 150,000 EVs within the US in just a few years. It’s removed from sure whether or not the demand will likely be there.

VinFast is dealing with some high quality points

VinFast’s VF8, an SUV which is at present its calling card, has an EPA vary of 207 miles, which is way beneath related EVs priced within the $50k vary. There are SUVs with a decrease beginning value, just like the Fisker Ocean that provides a 350-mile vary and has a considerably decrease beginning value. The VF9, with an EPA vary of over 300 miles has the vary to make it sensible for many drivers, however the value is way from being accessible to most shoppers because it begins at over $80k. There are additionally apparently some severe digital and different deficiencies that should be addressed, which is able to make these automobiles, which can be removed from being low cost, a tough promote if they aren’t resolved.

That is necessary as a result of so long as the standard/value supply isn’t there, it issues little or no that the main EV markets of the world are more likely to stay open on account of Vietnam’s favorable geopolitical positioning, so long as what they’ve to supply isn’t a beautiful idea general, it’s more likely to face difficulties promoting its automobiles, even when it does handle to ramp up manufacturing. That is particularly the case, provided that we’re not within the period of ready occasions for folks to get their EVs. The value/high quality competitors is simply beginning to warmth up, subsequently corporations like VinFast are more likely to battle to achieve market share from already-established carmakers.

Funding implications

It will be important for traders to not lose sight of what it means to take a position on this inventory. It’s a startup, inside the context of a booming trade, particularly EVs. I purchased some shares at $12/share when the market cap was at round $30 billion though essentially, maybe $8/share makes extra sense. I’m nonetheless ready to purchase a minimum of as many shares if it reaches about $8/share as I did with my first preliminary funding. I do imagine that the chances of this inventory reaching that value are excessive, however not assured, which is why I made a decision to take a nibble at present value ranges.

Even assuming that I’ll purchase extra of this firm’s inventory at a a lot cheaper price, VinFast will solely make up round 1% of my whole portfolio. That is very a lot a high-risk, high-potential reward alternative, subsequently it doesn’t match my general extra conservative funding technique to take a position a excessive proportion of my portfolio in such an organization. Whereas VinFast’s success has the potential to yield very excessive charges of return for traders from the present inventory value, as I defined on this article, there are many potential pitfalls alongside the best way, that may wipe this firm out inside the subsequent few years. There are inside pitfalls, resembling high quality points, in addition to exterior, such because the more and more oversaturated EV market. I’m approaching this funding having in thoughts the should be ready for both of the 2 potential situations enjoying out.