VinGroup gets even bigger

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News came out today that VinGroup received a $500m investment from GIC, the big Singapore sovereign fund. It is specifically in the VinCommerce subsidiary. This is the second big investment in VinGroup. Back in May 2018, it invested $853m in VinHomes prior to the IPO. In total, VinGroup has received $6.9bn through 15 transactions since 2013.

VinGroup is a beast with a market cap of $16.2bn (VND373tr), and VinCommerce is just a small portion of the business. VinCommerce is, as far as I understand it, the VinFast and VinFast+ stores plus some e-commerce. VinFast are supermarkets (121 in total), and VinFast+ has more than 1900+ convenience stores. Revenue at the division was VND19tr in 2018, a small portion of the VND122tr in total revenue for VinGroup. However, it is growing fast. Revenues in 1H were already VND14tr. One caveat is that is very difficult to know if the segment details in the financials/presentation, match revenues that GIC invested in. It could be that the subsidiary is more circumscribed that the full segment shows in the presentation.

These stores are losing money right now. According to the 1H2019 segment profit/loss, revenues for “retail services” were VND15tr resulting in a loss of VND2.2tr. Even adding back depreciation, the loss would still be almost VND2tr. In the presentation, consumer retail in the presentation had slightly lower revenue of VND14tr, and a gross profit of VND2.1tr. That’s a pretty low gross profit for a grocery business (even if it accounts for payroll), because other expenses like sales & marketing, overhead, etc, probably eat up the rest.

This is a big bet on VinGroup making grocery retail work. The revenue growth is there, in that they should really be able to get scale with all the stores they have now. And gross margin has improved drastically - gross profit was more in 1H2019 than it was in all of 2018. So the company is figuring it out.

Valuation? Based on VinGroup’s financials, it owned 64.3% of VinCommerce as of the end of 2Q. After this GIC investment, it still owns a majority stake. Let’s assume GIC got the best it could possibly get and VinGroup owns just 50.1% now. That means VinGroup sold around 14% of the sub for $500m, implying a total valuation of around $3.5bn, or about 20% of Vingroup. That equates to a P/S of 3.2x on a trailing basis. If the company just does what it did in 1H again in 2H, then P/S would be less than 3x. And it would be about 20x P/Gross profit.

Key points:

  • GIC is doubling down on VinGroup. It has a lot of other investment in Vietnam (back in October 2018 it was reported that GIC owns 5% of VietJet) as well.

  • A Korean company, SK Group, invested $1bn in Vingroup earlier this year. Part of this went into VinCommerce as well, so lots of foreign investors at looking at the sector and choosing VinGroup.

  • VinGroup’s strategy is to grow quickly through building, but also to acquire competitors. It bought Queenland Mart’s 8 supermarkets, and 87 convenience stores from Shop&Go in April. I couldn’t see acquisition costs, but

  • Market share is shifting away from traditional markets that should benefit all competitors. According to this article, 50-70% of essential food commodities come from traditional markets. And the traditional markets are not standing still - it looks like the government wants to support them. But I bet that a big portion of this consumption will move to more modern stores.

  • And because lots of companies agree with me, the retail market is extremely competitive, especially in the big cities. Circle K, 7 Eleven, Lotte Mart are all big foreign companies that are investing. And there are local competitors as well, including Co-op, which is as large as VinCommerce (in terms of supermarkets).

  • If we look at other very competitive markets, like the UK, competition really hurt grocery gross margin, because there was so much pricing pressure. Plus, stores need a certain level of sales in order to bear the costs of overhead, staff, and other non-variable costs. We could start to see this as the market matures.

  • It will be interesting to see if VinGroup can roll up stores quickly enough to forestall greater competition. They are getting the cash for it.

Ultimately, the investments in VinCommerce (based on my estimates, which could be off) seems really expensive. I did a quick scan of other grocery store chains, and most trade well below 1x sales. Even emerging market chains are trading below sales - MPPA, an Indonesia chain, trades at 0.1x, but even they don’t have the growth.

VinGroup itself is expensive. But it continues to attract a lot of money, and based on its filings, it would like to find 3 other big foreign investors.

Also, look for an IPO of VinCommerce. It is coming! Credit Suisse looks to be in the fast lane for this, based on the GIC investment.