Why EV Investment in VinFast is Putting Strain on Vingroup

Vietnam's prominent conglomerate, Vingroup, is under increasing scrutiny as its ambitious bet on EV maker VinFast continues to generate significant financial strain.

Foreign investors are retreating, borrowing costs are escalating and Vingroup's stock value hovers near multi-year lows. The challenges are amplifying concerns over Vingroup's broader financial health.

Investor concerns over VinFast's losses

VinFast, Vingroup's EV subsidiary, has struggled to profit despite receiving massive financial backing from its parent company.

Vingroup and its founder, Pham Nhat Vuong, have funnelled US$13.5bn into VinFast through loans and grants, with an additional US$3.5bn pledged in late 2023. However, the substantial investment has raised eyebrows among investors.

As a result, foreign investor confidence has dwindled significantly.

The combined value of foreign holdings in Vingroup has declined by 60% to approximately 15.7 trillion dong (US$620.5m). High-profile exits include investment giants BlackRock and DWS, while JPMorgan's asset management unit has nearly halved its stake. Even Vingroup's largest foreign investor, South Korea's SK Group, plans to reduce its holdings by mid-February 2024, potentially signalling broader divestment plans in Southeast Asia.

Financial ratings and borrowing costs

Adding to the financial strain, Moody's and Fitch recently assigned speculative-grade ratings to Vinhomes, Vingroup's most profitable unit and to its proposed US$500m international bond sale. The ratings reflect concerns about Vinhomes' exposure to Vingroup's escalating financial commitments.

Fitch estimates Vingroup's consolidated net debt to net property assets ratio could surpass 55% in the short term, warning that sustained levels above 60% might trigger a downgrade for Vinhomes.

Such a downgrade would increase borrowing costs, which are already rising. For instance, Vingroup issued two-year bonds in May 2024 at a steep 12.5% interest rate, significantly above the 2023 average of 10.6% for similar maturities.

Strategic challenges ahead

Experts warn that 2024 could be pivotal for Vingroup.

Leif Schneider, a legal expert at Luther in Vietnam, remarks: "Vingroup may face further financial erosion if VinFast's performance does not improve." 

He suggests that scaling back support to subsidiaries might alleviate the financial burden.

However, Vingroup remains steadfast in its commitment to VinFast. 

"Vingroup has been and will continue to support the subsidiary's development," the company reiterated, expressing optimism that robust growth across its units in 2024 would attract new investments.

Broader implications for Vietnam's economy

The challenges facing Vingroup highlight broader trends in Vietnam's investment landscape. The conglomerate attributes the foreign investor sell-off to rising US interest rates, which have affected investment flows across Southeast Asia.

However, some analysts believe Vingroup's heavy reliance on debt and ambitious growth strategies are further contributing factors.

As Vingroup navigates its precarious financial position, the future of VinFast looms. While the EV maker's narrowing losses offer a glimmer of hope, the conglomerate's mounting debt and waning investor confidence highlight the risks of its high-stakes strategy.

The coming months will be critical as Vingroup seeks to balance its ambitions with financial sustainability – all under investors' and credit agencies' watchful eyes.

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