Picture: SUPPLIED
Picture: SUPPLIED

The sell-off of Naspers shares, which have dropped to their lowest level in 15 months, may be a buying opportunity, say analysts.

Owing to its shrinking investment in Chinese internet giant Tencent, Naspers has slipped to its lowest valuation since July 2017. The stock, which accounts for nearly a fifth of the JSE, fell 6.5% to R2,656.89 on Wednesday, dragging SA’s main bourse another 2.5% lower.

That brings Naspers’s year-to-date decline to 26%, though that number is even worse in dollar terms. Its mainstay investment, Tencent, has slipped 31.5% – the biggest loss in market value of any company globally in 2018,  according to Bloomberg, which said Tencent had lost its spot among the world’s 10 biggest companies to Exxon Mobil.

Tencent’s precipitous fall is the result of disappointing first-quarter earnings, tighter regulation in China delayed approval for new games and the trade war between that country and the US, according to Nick Crail, fund manager at Ashbhurton Investments.

The trade war was taking its toll on China’s technology sector, with e-commerce giant Alibaba having retreated nearly 30% since its January highs, Crail said. The US tech sell-off also had a knock-on effect.

“As US rates have started to rise there has been a sell-off in growth assets like Naspers with value stocks performing significantly better.”

However, Crail said that while the Naspers share price was likely to continue tracking Tencent's closely “we see significant value in the Naspers share price at these levels”.

Investor fears about the trade war were “overdone”, while gaming approvals in China were expected to resume, he said. However, Tencent’s third-quarter numbers would probably be “weaker than initially expected”.

Independent investment analyst Mark Ingham said in a note that while negative sentiment in China was weighing on Tencent the company was “in a sound financial position”.

Ingham said the group’s balance sheet remained strong and  earnings per share were expected to grow at a compound annual rate of 22% over the next three years.

Based on forward earnings projections, Tencent was now “the cheapest it has been for a long time”.

“With Tencent at levels that take us back to mid-2017, pricing is starting to look interesting for new money in this stock and thus Naspers will benefit on the upside with a turn in sentiment,” Ingham said.

But long-term investor Bellwood Capital is sceptical about Tencent’s ability to maintain its high growth rate.

Bellwood was concerned that Tencent’s debts could stack up after a series of acquisitions and new investments, and it was also wary about complex structures behind Chinese technology companies, said David Nathanson, a global equity specialist at the investment manager. For instance, Tencent relied on a variable interest entity to attract foreign capital, and the legality of these structures was questionable.

Nathanson said that while Tencent was now cheap relative to prior valuations, the stock still commanded a hefty premium that would be justified only if it maintained a strong growth trajectory. “Any further earnings disappointments are likely to result in further multiple compression.”

Naspers's valuation discount relative to its Tencent investment remains stubbornly high, despite CEO Bob van Dijk's assertions that the group is taking steps to address the issue.