An EV stock rally that Chanos calls “crazy” is a dangerous short

An EV stock rally that Chanos calls "crazy" is a dangerous short

(Bloomberg) — VinFast Auto Ltd.’s astonishing rise has given… The loss-making electric car company has more market capitalization than Citigroup Inc., with popular short seller Jim Chanos calling the stock’s valuation “insane.”

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However, betting against the US-listed automaker is a risky endeavor.

Only 1% of VinFast shares are available for trading, making the shares illiquid and costly for short sellers to borrow. The small free float also makes VinFast vulnerable to unexpected fluctuations of the kind that added more than $75 billion to its value this week — a jump that helped it overtake General Motors and Ford Motor Company in terms of volume.

This makes short sellers wary even though VinFast’s increase seems inconsistent with the fundamentals of a company beset by poor product reviews and operational problems. While other thinly traded companies that gained US listings through so-called SPAC mergers eventually gave up their gains, the timing of any turnaround is very difficult.

Shares rose 32% Thursday to close at $49 with a market valuation of over $113 billion.

“Shorting the stock may seem logical at first glance, but we think at this point it’s not the best trading strategy,” said Tyler Manh Duong Nguyen, an analyst at Maybank.

A VinFast spokesperson said the company does not comment on market movements.

Regulatory filings show Pham Nhat Phuong, Vietnam’s richest man, directly and indirectly controls 99% of the company’s outstanding shares, mostly through his conglomerate, Vingroup JSC. Vuong is the richest person in Vietnam with a total net worth of $56.3 billion as of Thursday, according to the Bloomberg Billionaires Index.

VinFast went public through the merger of the SPCA this year with Black Spade Acquisition Co., which was founded by casino mogul Lawrence Hu.

Short sellers bold enough to bet against the company have incurred nearly $1 million in paper losses since the deal closed, according to data from financial analytics firm S3 Partners.

The small flotation and lack of large institutional investors participating in traditional lending schemes means that the supply of potential short sellers is “extremely scarce”, according to Matthew Unterman, a director at S3 Partners. “Prices for any scraps of the offer are traded in triple-digit fees,” which means that short positions are willing to pay more than 100% interest annually to bet against the company.

For investors familiar with the companies that have merged with SPACs, VinFast’s volatility may not come as a surprise. With the vast majority of shareholders choosing to exchange their stake for their own money – 92% of the investors in the VinFast deal did just that – the pool of shares available for trading tends to shrink.

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On paper, VinFast is now larger than the more than 400 S&P 500 companies after Thursday’s jump. Its valuation makes it larger than market commodities such as Citigroup and Goldman Sachs Group Inc.

VinFast, which began building a plant in North Carolina last month, expects sales to reach 45,000-50,000 this year, and Fung predicts they will break even by the end of 2024. In May, it recalled all electric sports cars it shipped. to the United States. Due to a software glitch, the company has also cut some of its US workforce amid modest sales.

The company expects revenue to reach $1.88 billion in 2023, according to a presentation to investors in June, which means it trades at roughly 60 times sales multiples. This is much higher than ratings for peers such as Lucid Group Inc. and Rivian Automotive Inc.

“Professionals won’t touch it with a sandal,” said Oktay Cavrak, product strategist at Leverage Shares.

– With assistance from John Cheng, Ainsley Thompson, Anders Mellen, Nguyen Kieu Giang, Rhea Rao, and Tom Maloney.

(Updates with stock movement, market valuations throughout.)

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