What’s going on here?

Vingroup, Vietnam’s largest company, plans to issue this year its first baht-denominated bonds as the sprawling conglomerate (1) seeks to expand its loss-making car business and (2) has exhausted its funding options at home.

What does this mean?

Opportunities and risks from Baht’s appreciation

The baht strengthened 8% against the U.S. dollar in 2019. The uptrend is expected to continue, backed by the kingdom’s steady current-account surplus. Consequences:

• Vingroup sources auto parts from Thailand for its young automaking business, and industry experts suggest the new funds might be used to pay for such imports. If Vingroup intends to invest outside Thailand, the baht’s gains could boost its purchasing power.
• This appreciation might increase debt service costs, making Vingroup carry financial risks.
• Unless the baht bonds are hedged, the currency’s strength may become a burden when the bonds mature.

Currency hedges are a form of financial contract that issuers can buy to protect them against changes in exchange rates.

Vingroup’s fundraising strategy

The group is also studying the possibility of issuing bonds in other foreign currencies in another market during the following months, according to sources at Vingroup and brokerages.

• In August, the group sent a letter to shareholders asking for approval to raise $750 million by issuing dollar-dominated debt in Singapore.

Vingroup’s business

Vingroup expanded aggressively over the past few years, with moves into smartphones and auto manufacturing. However, late last year the group suddenly signaled a shift in direction, with a slew of announcements of changes to its expansive portfolio.

Originally a property developer, Vietnam’s biggest conglomerate in 2014 began to diversify into fields including retail, education and health care. It entered car manufacturing in 2017 and made its way into electronics manufacturing in 2018. In July last year, the group said its expansion would reach the skies with a new aviation unit, only to scrap the plan. And then,

• On Dec. 3, the group shocked the market, saying it would withdraw from supermarket and convenience store operations by merging its consumer businesses with Masan Group.
• Following is another announcement on Dec. 18, when Vingroup said it would shut its appliance store chain in a move to completely exit directly operated retail outlets.
• Beyond the retail segment changes, Vingroup announced on Tuesday that it canceled plans to enter the aviation business.

Vingroup reported

• Revenue of 92.61 trillion dong in the first nine months of 2019, up 10%.
• Real estate-related business booked revenue of 56.05 trillion dong, declining 11%,
• The manufacturing segment posted a loss of 4.69 trillion dong on revenue of 4.51 trillion dong.
• Profit was 22.95 trillion dong, up 46%.
• Total assets were 357 trillion dong, up 33% on the year.
• Debts increased 36% to 231 trillion dong, equivalent to almost 2/3 of assets.

Vingroup’s plan

Vingroup in 2017 said it aimed to allocate $3.5 billion for developing the group’s auto brand, VinFast.

• The group earmarked $1.5 billion to build a factory with an initial output target of 250,000 vehicles a year. In practice, it had produced 15,000 cars just six months from the launch of production in June 2019.
• Pham Nhat Vuong, Vingroup chairman, told Bloomberg that he was ready to spend an extra $2 billion of his own money on VinFast with the aim of entering electric-car production in the U.S.
• Tran Hong Ninh, director of Auto Hospital, said Vingroup would need to invest a massive amount of money to make its way into auto and electronics manufacturing.
• Vingroup’s car unit declared in November a loss of up to 300 million dong per vehicle it put on the street. 

A source familiar with Vietnam acknowledged that the funding environment surrounding the conglomerate has deteriorated even as it focuses on capital-intensive industries. “It may be easier to issue baht bonds in Thailand than in other countries,” the source said.

• Vietnam’s central bank said it would adopt new regulations to tighten banks’ lending to the property sector, the group’s core business, to ensure the sustainability of the banking sector, which suffered from nonperforming loans.
• Vietnamese banks have also rushed to raise capital to meet Basel II standards as well. The new standards reduce banks’ ratio of short-term funds that can be used for medium-term and long-term loans to 40% this year from 45%, and to 30% by September 2022.
• “Mortgages have been tightened, banks’ capital is running out and loans for the real estate sector are reaching the ceiling, forcing companies to issue shares and bonds to raise funds for their investment,” said Anh Pham, an independent business growth and strategy adviser.
• Moody’s Investors Service in December cut its outlook on the Vietnam economy to negative, concluding its review for downgrade that began on Oct. 9. “Conditions are not good for Vietnamese entities to issue bonds in premier markets,” said Anh. “Thailand will be the best option for Vingroup’s baht-dominated bond issuance as its market regulation is more flexible.”

Content source: Onishi. T., Yuda. M. (2020) Exclusive: Vingroup plans Thai bonds as funding options narrow. Nikkei Asian Review. Available from: https://asia.nikkei.com/Business/Companies/Exclusive-Vingroup-plans-Thai-bonds-as-funding-options-narrow?fbclid=IwAR1gGDkfGOPqJW6IBcbbChmVoGK-lc-_52jiC4HjJRAJ8nWg4W8eSRvQ67M [Accessed 21 January, 2020]