GADFLY

Hong Kong Can Save the African Whale

Naspers has outgrown the South African market.
From

When you're the biggest fish in a small pond, sometimes the best thing to do is to seek more expansive waters.

Naspers Ltd. isn't so much a fish in a pond as a whale in a teacup. It accounts for almost a third of the MSCI South Africa Index, more than six times the weighting of the next biggest company. 

That top-heaviness is the legacy of one of the great technology bets of all time: 16 years ago, Naspers invested $34 million in an obscure Chinese internet company called Tencent Holdings Ltd. As of Thursday, its one-third stake was worth $159 billion.

That success has lifted Naspers to a market capitalization of $114 billion. Yet it should, arguably, be worth even more. The Tencent holding alone has a value about 40 percent higher than the entirety of Cape Town-based Naspers, a business that includes Africa's biggest pay-TV operation, classified advertising websites in Russia, and e-commerce investments around the world.

Anyone betting the discount will close may need plenty of patience: It's persisted for almost two years, and is widening. Naspers shares rose 77 percent this year in dollar terms; Tencent is up 107 percent in Hong Kong, adding 2.3 percent on Thursday after another blowout earnings report.

The limited size of the African company's home market is at least partly to blame. While conglomerate discounts are common, domestic fund managers are likely to hold fewer shares than indicated by the benchmark index when a company reaches this level of dominance, to avoid concentration of risk. A case in point: BlackRock's  iShares South Africa ETF underweights Naspers by 7 percentage points relative to the MSCI gauge.

Naspers could try selling some Tencent shares to narrow the discount, though the size of its stake means this probably wouldn't be more than fiddling at the margins.

In any case, it may not want to sell. As Gadfly argued in August, owning Tencent puts Naspers in a similar position to SoftBank Group Corp. with Alibaba Group -- in the box seat to gain access to other promising technology startup investments. Besides, Tencent's stock has momentum and may push higher.

A more obvious and practical route might be a dual listing in Hong Kong.

Historically, this option wasn't available because Naspers has dual-class shares. But Hong Kong Exchanges & Clearing Ltd. has recently proposed abandoning its opposition to multiple share classes. The plan may be cleared by lawmakers by year-end, which means Naspers could do an IPO as early as 2018.

Hong Kong offers a much bigger market with a deeper pool of liquidity: There are nine companies with a market cap of more than $100 billion. Tencent itself is the biggest, although its $472 billion gives it only an 11.8 percent weighting in Hong Kong's benchmark Hang Seng Index.

There are reasons to believe Hong Kong investors might be receptive to Naspers, which would offer the chance to buy an interest in Tencent at a substantial discount. The city's IPO market is hot and some of the best performers this year have been included Tencent as a backer: ZhongAn Online P&C Insurance Co., China Literature Ltd. and Yixin Group Ltd.

Naspers has other reasons for wanting to escape the confines of Johannesburg. While its stock has increased to 22 percent of the South African market from 13 percent two years ago, it's competing for a diminishing pool of overseas capital. Foreign institutional investors are selling South African stocks for the second year in a row as the economy slows.

Revenue at Naspers is barely growing, weighed down by its core pay-TV business, which is putting selling pressure on the stock. That may be less of a turnoff for retail investors in Hong Kong, who appear willing to buy anything Tencent-related.

It would be a major win for Hong Kong if Naspers decided to list in the city, giving a needed boost to the exchange's international ambitions at a time when names such as Glencore Plc and Coach Inc. have headed for the exits.

As for the African whale, the waters of the South China Sea must be looking inviting.

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

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