Falling business results major obstacle to tech unicorn VNG’s Nasdaq listing

Company leaders at Vietnamese tech unicorn VNG Corporation have had time to prepare for their U.S. listing, but declining business results have become a significant obstacle to the ambitions of chairman Le Hong Minh and his colleagues.

Big ambitions

According to a report by data analytics firms DataAI and AppMagic, Vietnam catapulted from the top 15 to the top 5 countries globally for app downloads from 2019 to the first quarter of 2023, amassing an impressive 4.2 billion downloads for apps originating in the country.

A recent assessment by Bloomberg also acknowledged Vietnam as a powerhouse in the gaming industry, counting among the top five countries globally in terms of mobile game production, based on download numbers in the first half of 2023.

With a rapid growth rate and much room for more, the Vietnamese gaming market is being targeted by many big names, including VNG Corporation - a nearly 20-year-old enterprise that has become well-known in the domestic market with popular games such as Swordman Online, PUBG Mobile, Valorant, and League of Legends.

VNG has also expanded to other fields such as media, fintech, and cloud computing services which have high potential in Vietnam.

In late August, VNG became the focus of attention when it announced that VNG Limited, which holds 49% of direct shares in VNG, had filed an initial public offering (IPO) on the technology-focused Nasdaq to the U.S. Securities and Exchange Commission (SEC).

Reuters quoted a person with direct knowledge of the matter that the tech unicorn plans to raise $150 million from this IPO. Its regulatory filings for the Nasdaq listing became public in late August, and it had aimed to debut in late September or early October

Founded in 2004, Ho Chi Minh City-headquartered VNG was Vietnam's first unicorn - a startup valued at $1 billion or more. The company's businesses include online games, payments, cloud services and Vietnam's most popular messaging app, Zalo.

Financial picture

Normally, for unicorns, investors will pay more attention to revenue growth targets. Although profits may be negative, the revenue growth rate shows that the company is following a strategy of continuously expanding its business activities - something common in startups such as Malaysia’s Grab and Uber of the U.S.

Similarly, VNG Corporation has achieved impressive revenue scale and growth. Its revenue increased from VND5.84 trillion ($239.6 million) in 2020 to VND7.52 trillion ($308.5 million) in 2021, equivalent to a compound annual growth rate (CAGR) of 13.5%.

However, VNG’s revenue growth rate in the above period showed signs of slowing, falling from 26.3% in 2021 to 1.99% in 2022. In the first half of 2023, the company's revenue reached VND3.23 trillion ($132.5 million), a slight increase of more than 4.2% over the same period last year.

VNG’s revenue is mainly driven by the number and level of user interaction on its platforms. In the gaming industry, a larger number of players will lead to more competition. This should create a "chain" effect that helps VNG maintain the popularity of its games. The business is based on a “free to play" model and most of this segment's revenue comes from selling virtual items in the game.

With many years of building a name in the hearts of gamers, as well as the release of many popular game titles, the game segment is the main contributor to the VNG revenue structure, with a proportion ranging from 81.7% in 2020 to more than 86% in the first six months of 2023. Notably, this is also the only field that has continuously generated profits for the company.

Besides games, another profit contributor is the media segment with the messaging application Zalo, the music platform Zing MP3, the online news aggregator Bao Moi, and the advertising platforms Adtima and Zalo Ads. The financial statements for the 2020-2022 period showed that this field was continuously profitable, with average growth of 137% per year. However, in the first half of 2023, the media segment reported a loss of VND153 billion ($6.28 million).

Revenue has failed to meet expectations while losses lingered, at VND650.6 billion ($26.7 million), VND732.3 billion ($30.05 million), VND2.06 billion ($84.53 million) and VND651.7 billion ($26.74 million) in 2020, 2021, 2022 and the first half of 2023, respectively.

In contrast to game production, the company's remaining business segments have suffered continuous losses. Fintech was the worst performer with a loss of VND858 billion ($35.2 million), VND1.47 trillion ($60.32 million), VND2.02 trillion ($82.89 million) in 2020, 2021, and 2022, respectively. A positive signal is that this segment’s loss dropped to only VND465 billion ($19.08 million) in the first six months of 2023.

The company attributed the shrinking losses to reduced marketing costs and increasing user engagement. For many years, VNG has poured capital into ZaloPay to encourage Zalo users to make transactions. However, the corporation said the strategy has shifted to focus on attracting merchants to reduce the burn rate. In its filing with the SEC, VNG admitted that it cannot compete with companies that have a broader selection of fintech products. Instead, the products it provides are mainly through cooperation with other financial institutions.

A notable point is that VNG had nearly VND2.3 trillion ($94.38 million) at the end of Q2 2023. The company has continuously received cash flows from capital mobilization activities and business segments recording profits from 2020 to the first half of 2023.

VNG reported after-tax profit of VND50.2 billion ($2.1 million) in the second quarter of this year, its first profit since the fourth quarter of 2021. The company's net revenue reached nearly VND2.25 trillion ($94.6 million) in the period, up 12.4% year-on-year, according to the company's consolidated Q2 financial statement.

It has targeted revenue of VND9.28 trillion ($394.5 million) and a loss of VND572 billion ($24.3 million) in 2023.

VNG is registered on the Unlisted Public Companies Market (UpCOM) as VNZ, which was trading for VND803,800 ($32.98) per share last Thursday.

Relationship between VNG Limited and VNG Corporation:

VNG Limited, which plans to list on the Nasdaq, holds a 49% stake in VNG Corporation. In addition, it also indirectly holds 21.3% of VNG Corporation’s shares through an agreement with BigV Technology Corporation.

BigV is a holding company in Vietnam (VN HoldCo), holding shares in VNG Corporation on behalf of foreign shareholders.