Naspers, a year on and the problems are much the same

Tencent, the Chinese company 31% owned by Naspers, has had a storming year, with the share advancing by 43.4%, valuing the company at $673.5-billion and making it the world’s second largest social media operator, after Facebook.

To understand just how big and profitable it is, look at these numbers. Tencent earned revenue of $16.7-billion in the three months to the end of June, up 26% year on year. Operating profit rose to $5.5-billion, up a staggering 29%. This says nothing about growth in the underlying investments, some of which are growing at 100% year on year.

In addition, news from Bloomberg that the United States government had softened its stance on Tencent’s social media platform WeChat, saw the share surge by 4.2% this week, regaining all but $9-billion of the $66-billion worth of losses incurred in August when US President Donald Trump banned American companies and individuals from using or interacting with WeChat. 

For Tencent, Naspers and Prosus shareholders, the strong results and share price appreciation is obviously good news, which is reflected in their share prices: Naspers has risen by 42% to R3,229.5 this year, while Prosus appreciated by 32.1% to €88.49. In rands, Tencent has returned 82% year to date, which highlights the underperformance of Naspers.

What this suggests is that South African investors would have been better off had they invested directly in Tencent - which is easy enough to do off local stockbroking platforms.

That’s because the share prices of Naspers and Prosus continue to trail their intrinsic value, or net asset value (NAV) in investing parlance. 

Naspers, whose combined share value put it at $82.8-billion, trades at a 32% discount to its holding in Prosus; while Prosus, whose value totals $192-billion, trades at a 33% discount to its NAV, which includes its stake in Tencent. 

Resolving this is a conundrum that the unbundling of Prosus from Naspers last September has patently not resolved.

If Prosus is included in the Eurostoxx 50 index in September as expected, it’s hoped the investment inflows will drive the price up and help narrow the discount between Prosus and Tencent.

But this is unlikely to solve the problem.

One issue is that Naspers and Prosus are investment holding companies, which have fallen out of favour with investors globally. On the JSE, cast an eye at PSG to see how its discount to Capitec has widened while internationally, Softbank’s discount to its stake in Alibaba continues to widen, says Steven Hurwitz, a portfolio manager with 36One Asset Management.

In addition, the discount is perpetuated by the complex voting structure of both Prosus and Naspers. The structure ensures that a small group of Naspers shareholders retain full control of both companies, which is not uncommon in tech companies. But it also means that shareholders have no way of holding management to account. 

Lastly, while Prosus’ portfolio of investments in the e-commerce, food delivery, payments and fintech spaces is growing and is increasingly profitable, this is dwarfed by Tencent. 

Management is working hard to remedy this, as its failed attempts to acquire food delivery business Just Eat and EBay’s classifieds business attest. But arguably, Tencent is just too big and too profitable for Prosus to ever be able to narrow the gap meaningfully.  

One suggestion is for Naspers to dispose of some of its Prosus shares – it holds 70% of the company – which would increase the free float in Prosus, while using the proceeds to buy back Naspers stock. Another option would be for Naspers to unbundle its shareholding in Tencent to shareholders, resulting in an immediate value unlock – although the prospect of this happening is remote.

“There has been pressure on Naspers to unbundle Tencent ever since it listed in 2004,” says Kevin Mattison, MD of stockbroking firm Avior. “Tencent has been one of the most successful investments in the history of investing, and it’s one that enabled Naspers to add R2-trillion to the JSE over 18 years, at huge benefit to SA savers.”

There are also advantages to Naspers retaining its stake in the Chinese firm. “Naspers has a seat at the boardroom table of one the most innovative technology companies in the world. This has benefits, for example being able to co-invest alongside Tencent, as they did with Swiggy in India,” Mattison says.

If one is prepared to stomach the discount, which is unlikely to vanish any time soon, the advantage of investing in Prosus is that it provides investors with exposure to Tencent and a portfolio of emerging market companies that are right in the sweet spot of ecommerce. 

It is also cheaper, trading on a price to earnings ratio of 18.8 times, versus Tencent’s 37.6x. BM/DM