Monster trade

That Naspers Tencent Gap Is Hard to Close

The deal of the century left the South African company over-reliant on one holding.
Qilai Shen/Bloomberg
NASPERS LTD-N SHS
-2152.00
At Closing, May 21st
318013.00 ZAr
TENCENT HOLDINGS LTD
-3.00
At Closing, May 21st
408.00 HKD

Naspers Ltd.'s conglomerate discount is widening. Its one-third stake in Tencent Holdings Ltd. alone is now worth 27 percent more than the South African internet company's entire market cap.

South Africa Discount

Naspers' Tencent stake alone is worth 27 percent more than its entire market value

Source: Bloomberg

After a 70 percent increase in its stock so far this year, Tencent is valued at a whopping 54 times earnings, almost twice the 30 times for Google's owner, Alphabet Inc. Why don't investors prefer Naspers? The Cape Town-based company is still trading at a more reasonable 36 times profit.

Much of Tencent's gain has been driven by Chinese investors. Over the last month alone, mainlanders bought a net HK$6 billion ($767 million) or so of the shares through the Hong Kong Shanghai Stock Connect. Their stake in the Shenzhen-based company has risen to 1.3 percent, from just 0.8 percent five months ago.

One could argue that foreign investors are more skeptical, and expect Tencent's shares to correct after its second-quarter earnings, due later Wednesday.

More likely, though, they suspect Naspers is a one-trick pony.

The South African company's $32 million investment in Tencent, in 2001, was the deal of the century: That stake is now valued at $128 billion. But Naspers doesn't have another genie in the bottle. Its biggest disposal was the $3.3 billion sale of a Poland-based online auction site, Allegro, last year. Naspers bought the company in 2008 for $1.6 billion, making the annual return a relatively unimpressive 10 percent.

If we strip out Tencent's numbers, Naspers has been bleeding cash in its core operations for two straight years. Unless it can show earnings from other holdings can outpace those from Tencent, investors may think it just got lucky. 

Saving the Day

Without Tencent, Naspers would have reported an operating loss for the last two years

Currently, there's no way for Naspers to monetize its stake in the Chinese company except by selling it. Tencent hands out hardly any cash -- its dividend payout ratio is only 12.4 percent. 

So why doesn't Naspers offload some of its Tencent shares?

Naspers is a hoarder, quite unlike a venture-capital fund that typically trades in and out of technology assets every five to seven years. Since 2005, the company has spent $8.2 billion buying stakes from Russia's largest classified website to India's most prominent e-commerce provider. But disposals have been few and far between: A total of $4.9 billion, of which $3.3 billion was Allegro. 

Hoarding

Naspers has been reluctant to dispose of its investments

Source: Bloomberg

Some would say it's sensible to retain a strategic stake in one of the world's seven biggest technology companies. Even from a high base, Tencent is expected to increase earnings by 27 percent annually over the next three to five years, according to data compiled by Bloomberg. Owning Tencent puts Naspers in the same league as SoftBank Group Corp., which has a broader base of technology investments.

My Precious

Tencent stake puts Naspers in the same league as SoftBank

Source: Bloomberg

Precisely because of this over-reliance on Tencent, Naspers needs to show it's running on more than luck. Otherwise, that valuation discount won't close.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Shuli Ren in Hong Kong at sren38@bloomberg.net

    To contact the editor responsible for this story:
    Paul Sillitoe at psillitoe@bloomberg.net

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