Naspers – revisiting the investment case - June 2020
Since 2015, Naspers has been the best-performing share on the JSE (generating a return of almost 20% p.a.) and has contributed significantly to the performance of the portfolios we manage on behalf of our clients. We continue to believe that it trades at a substantial discount to its intrinsic value and is one of the most attractive stocks in our market, and it remains the largest equity position across our domestic equity and multi-asset class portfolios.
THE PROSUS STRUCTURE
In 2019, Naspers undertook a major internal restructuring and injected its international internet assets into a new vehicle, Prosus, which is listed in Amsterdam with a secondary listing on the JSE. Naspers then unbundled 26% of its Prosus shareholding directly to its shareholders. The restructuring provided Naspers with access to international capital markets, and created a tax-efficient entry point for investors to gain exposure to Tencent and a portfolio of other high-growth internet assets. Furthermore, the structure provides Naspers with additional tools to manage the large discount to intrinsic value at which it currently trades. This was highlighted when they recently sold a portion of their Prosus holding to execute a Naspers share buyback – thereby unlocking over R3 billion in value for Naspers shareholders. Naspers currently owns 72% of Prosus, which comprises virtually all of Naspers’ intrinsic value.
TENCENT – THE JEWEL IN THE CROWN
With over one billion monthly active users, social network Weixin (or WeChat) is as central as to Tencent as it is to everyday life in China. The average user spends 77 minutes per day on the app and Weixin has a roughly 30% share of total internet time spent in China. Weixin’s value to Tencent is primarily as a powerful distribution platform for its other business lines.
Tencent is the leading developer and publisher of PC and mobile games globally. What many people underappreciate is that it also owns stakes in four of the most successful mobile game development studios in the world. It also currently has five of the top 10 games (as measured by daily active users) in its portfolio. In spite of increasing regulatory oversight in China, we believe the business can grow earnings in the mid-teen percentages over the next few years and, importantly, generate substantial free cash flow to fund Tencent’s other growth initiatives.
The most exciting area within Tencent at present is its digital payments and financial service businesses, which we think this will contribute significantly to group profits over the next three to five years. Tencent is also rolling out financial services products, such as banking, wealth management and insurance. Given its distribution capabilities, together with their treasure trove of user data, they are very well positioned to build a very large and profitable business.
It also owns a number of businesses that are significantly undermonetised, including the largest online video, music and literature platforms in China; Weixin is a largely untapped advertising opportunity; cloud services; and the largest internet/tech investment portfolio in China.
The Tencent share price has proven remarkably resilient this year. As the world’s largest videogame company, their core business was boosted by the isolation measures of the Covid-19 lockdown; and, going forward, the social consequences of lockdown - working from home and online education - will accelerate China’s shift to a digital economy. Also, we expect China to recover relatively more quickly than most Western nations, and that the risk of Covid-19 undermining the Chinese economy and Tencent’s business to be relatively low.
Outside of Tencent, Prosus primarily invests in three key areas – online classifieds, food delivery and payments/fintech. As a collective, they are currently loss-making; however, we believe that this masks the true quality and long-term profit potential of this portfolio of assets, all of which we believe are positioned to deliver significant value over time.
THE NOTORIOUS DISCOUNT
Many market participants believe that Naspers (and Prosus) should trade at a large discount to the value of its underlying assets. Our view is quite different. While a small discount can be justified, its management team has a proven ability in identifying and capitalising on major media and technological trends. Apart from identifying Tencent, Naspers also pioneered pay-TV services in South Africa, were a founding investor in MTN, the largest mobile operator in Africa and were early investors in ecommerce. Furthermore, we think that capital allocation discipline under CEO Bob van Dijk has been excellent.
We have engaged extensively with Naspers on a number of ESG-related issues in recent years. One particular area of focus has been on executive remuneration structures, and transparency and disclosures around the Remuneration Policy. While significant improvements have been made to date, we continue to engage on this matter.
Prosus currently trades at a c.35% discount to its intrinsic net asset value, while Naspers trades at c.50%. We find these discounts puzzling, given the quality of the assets and the long-term investment track record as discussed above. As such, we think the market is grossly mispricing these stocks at current levels and has therefore created a fantastic opportunity for long-term investors.
*All figures stated as at April 2020.
As published in Pensions World, June 2020 edition