VNG on a bumpy road in 2020

VNG faces difficulties this year due to Zalo Shop and Zalo Bank

VNG Corporation – a local game developer with market capitalisation of about $2.2 billion – this month integrated Zalo Shop and Zalo Bank into its Zalo application, allegedly without getting a licence to actually launch them.

The legal issue was disclosed by Dang Hoang Hai, head of the Vietnam e-Commerce and Digital Economy Agency (iDEA) under the Ministry of Industry and Trade (MoIT), who said that Zalo qualifies as an e-commerce application under Article 3.4 of 2015 Circular No.59/2015/TT-BCT outlining the management of e-commerce activities via applications and mobile equipment.

“Therefore, Zalo is responsible for registering for a licence at the MoIT,” he said.

So far, VNG has integrated six features into its Zalo platform since 2018 – Zalo Food, Zalo Travel, Zalo Taxi, Zalo Bank, e-Government, and Zalo Shop – with the aim of becoming an all-in-one application.

While only bringing the issue to the public now, iDEA had already contacted VNG three times last year and sent its legal representative to the authority to clarify the legal aspects of Zalo’s e-commerce activities.

In September 2019, the authority sent Document No.32/TMDT-QL assigning the Department of Cyber Security and Hi-tech Crime Prevention under the Ministry of Public Security to handle the case. The department has been investigating the issue ever since.

The slow progress may be accelerated through iDEA putting the issue into the limelight, especially after receiving confirmation from the State Bank of Vietnam (SBV) last month that it had yet to grant a licence for the Zalo Bank feature, which has partnered up with many banks to offer loan packages over the past two years.

In a separate development, the recent failure of a merger deal between Tiki and Sendo has also crossed the expectations of VNG holding 24.6 per cent of shares in Tiki. E-commerce companies have been racking up tremendous losses and have yet to earn a single cent of profit to shareholders. With the deal that was expected to create a force to be reckoned with – and even perhaps break-even numbers – falling through, VNG is looking at a war of attrition in e-commerce that could last for months if not years.

According to VNG’s financial report from last year, the more than VND500 billion ($21.74 million) investment it has poured into Tiki since 2016 has all been lost. To recover at least part of the capital that went into Tiki, the local game developer in 2019 reduced its ownership in the platform from 38 to 24.6 per cent.

However, the ownership rate continued to decline to 22.23 per cent right after Tiki raised its charter capital from VND190.9 billion ($8.3 million) to VND208.3 billion ($9.05 billion), following the latest financial report of VNG.

This may encourage VNG to reconsider its investment in the e-commerce sector and focus on the game business, which currently makes up about 80 per cent of its earnings. The remaining 20 per cent is shared between Zalo and its cloud computing service VNG Cloud (previously VinaData).

According to information published at its shareholders’ meeting in June, before the legal issues around Zalo became public, VNG’s net revenue in 2019 was VND5.178 trillion ($225.13 million), up 20 per cent on-year. The after-tax profit was nearly VND455 billion ($19.8 million), up 36.5 per cent. In 2020, the firm expected to receive about VND6.714 trillion ($291.9 million) in revenue, generating an on-year increase of 20 per cent.

Notwithstanding, it also forecast a negative after-tax profit of VND249 billion ($10.83 million) due to accelerating investment in ZaloPay – its e-wallet application operated by Zion that is also neck-deep in losses.

In 2018, Zion – in which VNG holds 60 per cent – reported a deficit of VND133.4 billion ($5.8 million), as much as seven times its loss in 2017.