Source: East Forty Article Capital (ID: Dsst Capital), author: Tao Huidong
If VNG is successfully listed, Tencent, Kingsoft and Ant Group will also receive additional shares.
VNG has historically been invested mainly by major Chinese Internet companies and GIC by the Singapore government investment company.
Last week, the SEC disclosed the prospectus of VNG, Vietnam's largest internet company. U.S. stocks are about to usher in another "Vietnam concept stock".
Founded in 2004, VNG owns Zalo, Vietnam's largest instant messaging app, and is also Vietnam's largest gaming company, known as "Vietnam's Little Tencent". It is not only Vietnam's first "technology unicorn" company, but also the first Vietnamese Internet company to apply for listing in the United States. It can be said that VNG is the "hope of the whole village" of the Vietnamese Internet.
This year's U.S. stock market set off a "Vietnam whirlwind". On August 15, Vietnamese electric car company Vinfast was listed on NASDAQ, an electric car company that delivered less than 20,000 vehicles, becoming the first monster stock in the United States this year, the stock price soared more than 7 times, and as of August 25, the market value has reached 160 billion US dollars, surpassing many Chinese companies such as BYD and Wei Xiaoli, becoming the third most valuable car manufacturer in the world after Tesla and Toyota.
VNG is expected to complete its listing in September at the earliest, can it become another Vietnamese monster stock by then? Tencent and Kingsoft first invested in VNG in 2010, when its valuation was only about $200 million, and with the listing of VNG, it is believed that it will also bring a considerable profit.
01 Vietnam's first unicorn growth story
VNG is a classic investor venture. Its CEO and founder, Le Hong Minh, is not a programmer by training, he graduated from Monash University in Melbourne, Australia, where he studied finance. After returning to Vietnam, Le first worked at PricewaterhouseCoopers and then joined VinaCapital, a well-known local VC and the only integrated investment firm in Vietnam, as a managing director.
Another co-founder and president of VNG, Vuong Quang Khai, is a Vietnamese programmer who graduated from Columbia University in New York with a master's degree in computer science and developed Vietnam's search engine hoatieu, Zing MP3, Zalo and other VNG's most successful Internet products.
Le Hong Minh and Wang Quang Khai are both post-70s and the first generation of "Internet people" in Vietnam. When VNG was founded in 2004, it was just a simple game company, and it was still the era of Internet cafes. Le Hongming, who himself recalls his entrepreneurial history, said that in order to promote the first game, they "rode motorcycles all over 5,000 Internet cafes in Vietnam" and plastered their game posters in Internet cafes.
The first game launched by VNG was the RPG game "Sword Warrior Love" licensed by Kingsoft Software, which achieved far more success than expected after its launch, and still has a large number of players in Vietnam, which can be called the Vietnamese version of "Legend". But as the Vietnamese internet gradually developed, their dreams also grew bigger and bigger, and soon went beyond the scope of the game.
In 2007, VNG founded Vietnam's first music website, Zing MP3, which is still the dominant online music market in Vietnam.
In 2008, VNG launched the game distribution platform ZingPlay, which operates in other countries in Southeast Asia and Latin America in addition to Vietnam.
In 2009, VNG launched its social networking product Zing Me. Although Zing Me failed to stir up any waves and was completely defeated by the foreign Facebook and withdrew from the market, VNG launched Zalo three years later, this time with great success.
In 2017, VNG launched ZaloPay based on Zalo to enter the fintech field.
The rapidly growing VNG began to attract the attention of investors around 2010 and became the first unicorn company in Vietnam. VNG has historically been invested mainly by major Chinese Internet companies and GIC by the Singapore government investment company.
According to the prospectus, VNG adopts an AB share structure. Among the two founders, Li Hongming holds 8% of the shares and owns 45% of the voting rights; Wang Guangkai holds 1.1% of the shares and owns 6.0% of the voting rights.
In terms of external shareholders, Tencent alone holds 43% of the shares, but only 23% of the voting rights; GIC holds 10.1% of the shares and 5.4% of the voting rights; Ant Group holds 5.1% of the shares and has 2.8% of the voting rights.
In addition, if VNG is successfully listed, Tencent, Kingsoft and Ant Group will also receive additional shares.
Among them, Tencent will receive 7542240 shares (equivalent to about 5% of VNG's total shares) granted free of charge "in recognition of its long-term investment in VNG". Kingsoft was granted 5605186 shares in 2010 at an exercise price of $1.50 per share. Ant Group has 7773093 warrants, the exercise of which is subject to the completion of the IPO, at a price of VND 157954 (about US$6.50) per share.
Tencent and Kingsoft first invested in VNG in 2010, when its valuation was only about $200 million, which will undoubtedly become another successful example of Tencent's investment.
02 Vietnam's Internet market remains weak
Today's VNG is undoubtedly the "hope of the whole village" for Vietnam's Internet industry.
In the prospectus, VNG divides its business into four segments: gaming, communications and media, fintech and long-term opportunities (mainly cloud services, big data and Internet of Things). Among them, the top two businesses, VNG, are in a position of solitude and defeat in Vietnam.
In terms of games, 2022 data shows that VNG occupies about 39.2% of the market share of Vietnam's mobile game market, making it the largest mobile game publisher in Vietnam, which is close to Tencent's position in the Chinese game market.
In terms of communications and media, VNG owns Zalo, Vietnam's largest instant messaging app. Zalo's position in Vietnam is somewhat similar to WeChat's in China. The most commonly used instant messaging apps in most countries in Southeast Asia are WhatsApp or Line, but in Vietnam Zalo has basically replaced them. In addition, VNG also has a series of products that are very popular in Vietnam, such as Zing MP3, the largest music app in Vietnam, and Bao Moi, the largest news aggregator app in Vietnam.
As the most powerful technology company in Vietnam, VNG also carried the banner of Vietnamese AI and launched Vietnam's first large-language model KiLM.
However, limited by the narrow market in Vietnam, VNG, as the "little Tencent of Vietnam", still has a huge gap with Tencent. In 2022, VNG's revenue is only $320 million, less than two percent of Tencent's. This gap is much larger than the size gap between the two economies of China and Vietnam. Vietnam's total population in 2022 is 99.6 million, and its GDP is US$413.8 billion, which is one-fourteenth and one-fortieth of China's, respectively.
The main reason for this result is that Vietnam's Internet users' ability and willingness to pay are still very weak, and many of VNG's products have not yet found a good profit model.
Taking online music as an example, Statista estimates that the total music streaming revenue in the Vietnamese market in 2023 will only be about 37 million US dollars, and it is expected to reach 46.6 million US dollars by 2027.
Although VNG's music app Zing MP3 has become the first in Vietnam, its only source of revenue is advertising. In order to avoid excessive impact on the user experience, it is necessary to limit the frequency and duration of ad playback, which seriously restricts the ability of advertising monetization. Zing MP3 also does not have the ability to fully legalize the music content on the platform, and VNG admitted in the prospectus that it may lack a full copyright license for some music content on Zing MP3, thus continuing to face infringement lawsuits.
In terms of cash flow, VNG is currently heavily dependent on its gaming business. In 2022, VNG game business revenue was $250 million, accounting for 80% of total revenue. Other businesses, while also sitting on a large number of users, generate very little revenue.
The potential of VNG lies in Vietnam's economic development prospects. Vietnam is the most popular fried chicken among emerging markets in recent years. Vietnam has a high-speed GDP growth, with a compound annual growth rate of 8.1% from 2019 to 2022, and the IMF predicts that Vietnam's GDP can grow at a compound annual growth rate of 10.5% from 2022 to 2027; Viet Nam also has a highly young demographic, with 68% of the population aged 15-64 of the working age, and the rest are mainly children under the age of 15 (23% of the population). With the increase of per capita income and urbanization rate in Vietnam, the user value of VNG will also increase for a long time.
In addition to Vietnam's own economic growth, VNG also highlighted its overseas market strategy in its prospectus. At present, VNG's communications, media, and fintech businesses are completely limited to Vietnam, but the mobile game business has achieved some results. In 2022, 20% of VNG's revenue will come from outside Vietnam. VNG regards the whole of Southeast Asia and Taiwan as its core markets, and Latin America is also a key market. According to Newzoo, ZingPlay, a mobile game distribution platform owned by VNG, ranked first in the mobile card game genre in Latin America in 2021.
It has to be said that Vietnamese technology companies are very good at drawing the pie of "going to sea", and VNG's emphasis on overseas markets is the same as Vinfast's. While most of Vinfast's EV deliveries come from Vietnam's home market, it also claims in its prospectus that the United States, Canada in North America, and France, Germany and the Netherlands in Europe are its "primary target markets," along with Vietnam.
03 Growth peaked, crazy burning money to push financial technology
Another major puzzle of VNG is that although it is already the first brother of Vietnam's Internet, its profits are still far away.
According to the prospectus, in the three years from 2020 to 2022, VNG lost $27.07 million, $30.47 million and $86.71 million respectively, and the loss range increased year by year.
There are many reasons why VNG loses money. As mentioned earlier, many of VNG's products are not very revenue-generating, and the only revenue pillar is games.
MNG, on the other hand, has a weak self-research ability, and its main business model is to introduce popular mobile games from overseas (mainly China) and then distribute them in Vietnam. VNG owns the distribution rights to League of Legends in Vietnam, and other important games include Call of Duty Mobile, JX1M licensed by Kingsoft Games, Kiem The Origin, and Oracle from NetEase. VNG relies heavily on partnerships with Chinese game companies. In the second half of last year, China controlled the issuance of game version numbers, which led to a great impact on the pace of VNG's upstream, and the number of active users fell seriously.
The lack of own IP limits the profitability of VNG's gaming business, which generated a profit of only $42.36 million in 2022 with revenue of $250 million.
The main reason for VNG's loss is the investment in the fintech business regardless of cost. VNG's prospectus excludes "incentive fees" paid to customers from calculating revenue, which results in negative revenue from VNG's business, which is -$16.35 million in 2022. In other words, VNG's fintech business is pure burning money, and the money collected from customers cannot catch up with the money paid to customers.
If costs are added to this, VNG's fintech business has a net loss of $84.84 million in 2022, equivalent to twice the profit of the gaming business. Therefore, it is not surprising that VNG has suffered huge losses for years.
So, why should VNG smash into fintech? In fact, VNG, like Chinese Internet companies, faces the so-called second half of the Internet problem. As the internet dividend fades, VNG's user growth is slowing.
Vietnam's internet population in 2022 was 75.7 million, accounting for 76.2% of the total population. The number of VNG users has also reached this scale.
As of the second quarter of 2023, VNG's gaming business QAU (quarterly active users, that is, played at least once in a quarter) was 78.4 million, and has ceased to grow in recent years. The global mobile game market has basically been swept up into a red ocean by Chinese game companies, and VNG faces quite fierce competition.
Number of QUs for VNG game business, unit: millions
At the same time, the number of users of VNG's instant messaging application Zalo has reached 75 million, which means that basically all Internet users in Vietnam are already Zalo users, and Zalo's user growth has basically peaked.
Zalo monthly active users, in millions
Therefore, for VNG to achieve the company's further leap, fintech is almost the only answer. VNG's definition of fintech business, which mainly includes digital payment, wealth management, insurance and credit, estimates the size of Vietnam's fintech market in its prospectus, and believes that it will reach US$52.4 billion by 2025, which is more than 10 times the size of the entire Vietnamese Internet communication and media (including social media, digital advertising, content payment) market, and twice as large as the game market in Southeast Asia, Taiwan and Latin America combined. It can be seen that the "pie" of financial technology is bigger than the so-called "going to sea" pie.
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