ANALYSIS-Vietnamese EV maker VinFast's move to shift $7 billion in debt raises 'red flags'

Over the last decade, Vietnamese electric vehicle maker VinFast Auto has ‌burned through ​billions of dollars on an aggressive expansion.

Now, a plan to sell its two main factories and shift $7 billion worth of debt off its books has sparked concerns about governance at billionaire Pham Nhat Vuong's Vingroup conglomerate. Vuong, who got his start selling instant noodles in Ukraine in the 1990s, has built Vingroup into Vietnam's largest company. Through it, he owns hotels, amusement parks and Nasdaq-listed VinFast. He ‌has also developed a reputation for complex, intragroup transactions - Reuters previously detailed VinFast's reliance on Vingroup-related companies for sales and financing.

Under a multi-party deal unveiled last week, VinFast will sell its Vietnamese manufacturing business for 13.3 trillion dong ($506 million) to a group of investors who will also assume roughly $6.9 billion in debt. In a regulatory filing, the company said this will allow it to adopt an "asset-light" model focused on research and product development rather than manufacturing. With the manufacturing unit off its books, VinFast will become largely debt-free, Vingroup told Reuters in a statement. Manufacturing costs ‌were a major driver of the EV maker's $3.9 billion loss last year and VinFast has yet to turn a profit since its 2017 founding.

But the deal has raised eyebrows among some analysts and retail shareholders both for its complexity and the involvement of ‌investors with ties to Vingroup and Vuong, the founder. "From a strategic and financial perspective, this move makes sense and provides a solid foundation for VinFast to grow," said Mehdi Jaouadi, an auto industry analyst and partner at Singapore-based consultancy YCP. "However, from a governance perspective, this strategic decision has some red flags and raises some question marks."

One issue is the involvement of real estate businessman Nguyen Hoai Nam, who just this month took control of the company that will acquire more than 95% of the manufacturing business. Nam is a board member of Vincom Retail, which was formerly Vingroup's shopping mall arm. Days before the factory deal was unveiled, he acquired majority control ⁠of Future ​Investment and Trading Development (FIRD), a company that was carved out of ⁠VinFast and until January, was owned by Vingroup and Vuong. FIRD holds patents for VinFast's first-generation EVs and has registered capital of $4.6 billion, nearly 92% of which is contributed by Nam.

It is not clear why FIRD "became the lead buyer so soon after these ownership changes," Jaouadi said. Vincom declined to comment. Reuters was unable ⁠to reach Nam for comment.

In a statement, VinFast said it "was not a party to these transactions and therefore does not have the basis or authority to comment." 'PRECIOUS STONE'

Another concern is the transaction structure. The manufacturing business will first be acquired by Vuong, FIRD and another company, Ngoc Quy Investment and Trading ​Development, before the ownership is reshuffled again. Once the deal is completed by September, only two of the three investors will remain: FIRD, which will own 95.5%, and Vuong, who will retain less than 5%, according to the filing. The process "raises ⁠the question of the role and involvement" of Ngoc Quy Investment, Jaouadi said, since it will not ultimately hold a stake.

The real estate company, whose name means "precious stone" in Vietnamese, declined to comment. Some of its shareholders have been business partners with Pham, according to a filing. Vuong will be participating in the factory transaction as both a ⁠buyer ​and a seller. VinFast will retain its assembly plants in Indonesia and India, along with patents for its newest generation of EVs. VinFast's shares have fallen about 12% since the deal was unveiled on May 12.

Vingroup is controlled by Vuong and the firm does not have any large institutional investors. Dragon Capital, a foreign-owned, Vietnam-focused fund based in Ho Chi Minh City and one of the few foreign investors in Vingroup, did not immediately respond to a request for comment.

FOXCONN INTERESTED IN 2021 By outsourcing its manufacturing, a smaller EV ⁠maker like VinFast could focus its precious resources on areas that are more important, like developing better software, according to Felipe Munoz, a veteran auto industry analyst.

As part of the deal, the new owners can use VinFast's plants to produce cars and batteries ⁠for third parties. One Vietnam-based financial analyst who declined to be named because ⁠of the sensitivity of the matter, said it was possible that there was another manufacturer who was waiting in the wings to tie up with the new investors. In 2021, Vingroup said it was approached by Taiwanese contract manufacturer Foxconn regarding VinFast's production lines, but no deal materialised.

"We have no plans to sell VinFast's manufacturing facilities in Vietnam to Foxconn or any other original equipment manufacturer," Vingroup ‌said when asked about potential fresh talks. Foxconn, which ‌is trying to expand in the EV sector, did not respond to a request for comment.

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