23 February 2019
South African telecom and internet giant Naspers holds one-third of Tencent. Photo: Bloomberg
South African telecom and internet giant Naspers holds one-third of Tencent. Photo: Bloomberg

If you missed Tencent, Naspers could be an alternative

As share price of Chinese tech giant Tencent Holdings (00700.HK) keeps roaring ahead, many are faced with a tough decision to buy or not to buy at the current level.

While investors are afraid of missing the train, they are equally concerned about Tencent’s record share price.

As an alternative, Naspers, a South African e-commerce and pay-TV giant that holds one-third of Tencent (the stake is now worth US$133 billion), maybe worth considering.

Naspers made its first investment in Tencent in 2001. The South African firm kept adding to its position to become the largest shareholder.

Its current stake of 33.25 percent is much bigger than that of founder Pony Ma (8.73 percent).

While Ma reduced its holdings a number of times since Tencent became a listed firm in 2004, Naspers has so far not sold a single share.

Founded in 1915, Naspers has transformed itself from a newspaper publisher into a dominant player in telecom and internet services in South Africa and various African nations.

In addition to Tencent, Naspers also owns nearly one-third of Russia’s largest internet company Digital Sky Technologies (DST), which has investments in Facebook, Groupon and Zynga.

Currently, Naspers has operations in more than 130 nations across the world and has established itself as the biggest telecom operator in Africa. It also has great influence in India and Brazil.

Naspers reported revenue of US$14.56 billion and operating profit of US$2.75 billion in the fiscal year to March 31, up 20 percent and 27 percent, respectively, from the previous year. Of this, Tencent contributed US$7.5 billion or half of its revenue.

While Tencent shares have done very well, Naspers, however, lags far behind.

Concerns about South African’s political uncertainty and faltering economic growth have kept its stock market in the doldrums, posting a meager 4.5 percent gain in 10 years.

Naspers, the nation’s largest public company which has surged 17 times over the past decade and jumped 26 percent over past 12 months, is far ahead of the overall market. Still, such performance pales in comparison with Tencent’s 45 times and 64 percent surge in the same periods.

Naspers has a market cap of about US$100 billion, even less than the market value of its Tencent stake.

The huge valuation discount has prompted some of its investors to speak out.

They urged Naspers chairman Koos Bekker to take quick measures to monetize the company value, such as selling some Tencent shares to pay cash dividend or hand out Tencent shares to them directly.

Bekker ruled out the option saying that the company has no intention to change its investment in Tencent. However, Naspers has a highly fragmented shareholder structure, with South Africa’s sovereign wealth fund PIC holding 13.97 percent as the largest shareholder. The remaining 70 percent stake is in the hands of various institutional investors in Europe and the US. Hence, it won’t be easy for Bekker to ignore such requests.

In practice, selling Tencent shares in bulk in the market might put pressure on share prices, but if Naspers is keen to offload its stake, Chinese state funds should have strong interest in buying such an strategically important company.

Perhaps, Tencent can acquire Naspers and swap shares with it, which would enable the Chinese internet giant to acquire the latter’s business operations in Africa, India and Brazil. If so, Tencent would have access to two-thirds of the world’s population and Naspaers shareholders would hold Tencent shares directly.

Naspers is an interesting alternative to Tencent. That said, legal, political and foreign exchange risks are factors investors should consider before they decide to go ahead.

This article appeared in the Hong Kong Economic Journal on Aug. 28

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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