Ninety One makes the case for investment in Tencent
Asset manager sees its 50% discount arising from poor sentiment towards Chinese stocks
Ninety One, SA’s largest money manager, says the investment case of Chinese multinational technology conglomerate Tencent is still appealing and believes the recent moves by the company position it to deliver high returns in the future.
The asset manager believes Tencent, of which Naspers owns a large chunk, is trading at a 50% discount due to poor sentiment towards Chinese stocks and not because of its fundamentals.
Rehana Khan, portfolio manager at Ninety One, said Tencent’s management has been making the right moves to unlock further value.
“We still really like the Tencent investment case ... the inward focus by Tencent has resulted in strong growth in the new verticals that they are playing in, be it the many games they are rolling out, be it advertising, which is benefiting from a cyclical recovery and the rollout of video accounts,” Khan said at a webinar held by the company on Wednesday.
“All these things are margin and cash flow enhancing, giving Tencent the ability to have excess cash flow, reinvest some of that in the verticals and step up share buybacks given the value inherent in the share at current levels.”
Naspers in November said its performance outside Tencent has improved so much that it expects to reach profitability earlier than expected.
The group’s value has long been tied to its almost one-quarter stake in the Chinese internet giant. As such, Naspers is working to prove the value of its other businesses in food delivery, classifieds, fintech and education.
While the group expected these businesses would be profitable in the first half of its 2025 year, it now expects this to happen in the second half of the current year. This translates to the goal being reached by March.
Khan said they are also encouraged by moves by Naspers to close the discount to net asset value (NAV).
The company has historically traded at a discount of 35%-40% to its NAV per share, a situation in which assets held within Naspers are worth more individually than what the market values the company at.
To deal with this challenge, a year ago the group embarked on an aggressive share buyback, purchasing billions of rand worth of its stock. This was after the board approved an open-ended repurchase programme of Prosus and Naspers shares, designed to unlock immediate value for shareholders and increase NAV per share over time.
Naspers has said the share buyback bonanza created more than $25bn in shareholder value.
“While we do not believe 2024 is the year that the discount will be closed, the management is actively doing the right things to try to close that discount,” Khan said.
“We do need clarity on who the new CEO is, and the strategy beyond 2025,” she added.
“We do know that up to 2025, there is a better capital allocation going on. We also know that they are trying to break even in a lot of their assets and not putting money in a black hole. All that should underpin Naspers to 2025.
“But I think the market is a bit smarter than that and is waiting to see that once they break even, where is the growth going to come from and what are they going to do with their capital going forward?”
Bob van Dijk stepped down as CEO of Dutch e-commerce investor Prosus and its controlling shareholder, Naspers, in September, replaced temporarily by Ervin Tu, Prosus’ group chief investment officer.
With Mudiwa Gavaza
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