Rising high: The tall buildings centre left are Tencent’s new headquarters in Shenzhen, China. Picture: BLOOMBERG/QILAI SHEN
Rising high: The tall buildings centre left are Tencent’s new headquarters in Shenzhen, China. Picture: BLOOMBERG/QILAI SHEN

Naspers is the undisputed giant among SA companies with its R1.13trillion market capitalisation equal to the combined market caps of its nearest rivals, Steinhoff, FirstRand, Sasol and Vodacom. But as impressive as Naspers’s market cap may be, it should arguably be at least a third higher.

This would merely bring Naspers’s market cap into line with the R1.52 trillion value of its 34% stake in Chinese online giant Tencent Holdings. Naspers paid US$33m for its Tencent stake when it acquired it in 2001.

As things now stand, the market is seemingly valuing all of Naspers’s other interests, which generated total revenue of $7bn in its year to March, at a negative R390bn. This is up from a negative R178bn just four months ago.

The negative valuation is even bigger if Naspers’s other listed interests are taken into account. The largest of these is a 29% stake in Russia’s biggest Internet services group, London Stock Exchange-listed Mail.Ru, worth R19.4bn. Mail.Ru reported a net profit of $198m in its year to December.

Another R6bn would be added by Naspers’s 68% stake in Stockholm Stock Exchange-listed Vostok New Ventures (VNV), owner of Avito, Russia’s largest online classifieds business. VNV’s net profit was $135m in its year to December.

Even when Naspers pulls off major deals, investors remain myopically focused on Tencent, says Cy Jacobs of 36ONE Asset Management. He points to Naspers’s sale of its Polish
e-commerce business Allegro in October last year for $3.25bn.

“The deal was worth R45bn at the time,” says Jacobs. “If any other SA company had done a deal this big it would have made waves, but in Naspers’s case it was ignored by the market.”

Naspers is not the only company where investors appear focused on only one of its assets. Another is US group Altaba (formerly Yahoo), which has as by far its largest holding
a 15% stake in Chinese e-commerce heavyweight Alibaba.

Based on Alibaba’s current market cap, Altaba’s stake is worth $53bn, yet its own market cap is only $50bn. With Altaba’s other interests added, including a 35.5% stake in Yahoo Japan, the total value of Altaba’s underlying assets is around $62bn.

Seemingly the key reason for Altaba’s big discount to the value of its underlying assets is tax it would have to pay should it sell its Alibaba stake. According to US publication Fortune, Altaba’s regulatory filings indicate that the tax rate on capital gains realised would be 36.5%.

But while an overhanging tax charge seemingly explains the big discount to Altaba’s underlying assets, it does not appear to do so in Naspers’s case.

“Naspers holds its stake in a complex non-taxable structure offshore,” says Jacobs. “Any capital gain realised on Tencent would not be taxable in Naspers’s hands.”

It adds weight to calls for Naspers to realise the value that Tencent has created for it. The latest call came from Switzerland-based fund manager Albert Saporta, who, in an open letter to Naspers CE Bob van Dijk, accused him and his executive of destroying $334m of shareholder value over the past three years.

For Naspers to dispose of its stake in Tencent is easier said than done. For one, finding a buyer with the financial muscle needed would be a tough call. Even if there were one, a deal may be impossible.

“The Chinese government would probably not allow another foreign company to acquire a large stake in Tencent,” says Jacobs.

This would also seem to rule out an unbundling of Tencent to Naspers shareholders.

Jacobs proposes an alternative deal. “Tencent could acquire Naspers,” he says. “With an offer pitched at, say, R3,400 per Naspers share it would get its own shares back at a 10% discount and Naspers’s other assets for free.”

A price of R3,400 would represent a premium of about 30% above Naspers’ current R2,600 share price.

Saporta’s call for Naspers to realise the value locked up in Tencent is far from the first. “Calls started coming not long after Naspers acquired its stake,” says Jacobs. “Wisely, Naspers management ignored them. They knew there was no other asset that would generate the growth Tencent has.”

Nadim Mohamed of First Avenue Investment Management believes Naspers must stick
to its guns. “My preference is that they hold
onto Tencent until the rump of the business is profitable,” he says.

For now Naspers is riding high on the back of Tencent, which in its year to December upped revenue 48% to $21.9bn, with net profit jumping 42% to $5.975bn. For Naspers it was the key driver of a 41% rise in core (equity accounted) headline earnings to $1.72bn.

Tencent increased its growth pace in its latest quarter to March, beating analysts’ consensus forecast hands down to up revenue 55% to $7.18bn and net profit 57% to $2.109bn.

Big drivers of growth included social networks, where revenue increased 56% to $1.8bn. Tencent’s social network platforms, WeChat and Weixin, increased active user accounts 23% to an astonishing 938m.

Online games also grew apace, with revenue, aided by the blockbuster Honour of Kings launched in late 2015, jumping 34% to $3.3bn.

The biggest rise came from Tencent’s mobile payments unit WeChat Payment, where revenue lifted 224% to $1.1bn. WeChat Payment, launched in 2014 as a rival to then dominant Alibaba unit Alipay, already has a 40% and growing share of China’s $5.5trillion mobile payments market.

There are no signs of Tencent’s rapid growth slowing any time soon. A consensus forecast by analysts polled by Thompson Reuters is looking to a combined 82% rise in earnings in the next two financial years ending 2018.

It’s reason enough to justify Naspers’s 49.8 p:e ratio based on core earnings. The bonus for Naspers shareholders will be for the bulk of its assets — spread across 16 major brands spanning markets including e-commerce, payments, entertainment and classifieds in over 130 countries — to generate an overall profit.

The trend is in the right direction, with the combined trading loss on the rump of Naspers’s assets cut to $277m in its latest financial year, from $352m the previous year.

Naspers is on a bold developmental path with the potential to create significant value for shareholders, not destroy it.

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