Introduction: Tencent (HK:0700) is the driving force behind Naspers (JO:NPNJn) and Prosus (JO:PRXJn). Prosus owns 27.99% of Tencent. Any move in the price of Tencent will affect both Prosus and Naspers. Year-To-Date (YTD) Tencent is down 33%. Naspers is down 6%, while Prosus is down 23%. The drop is a result of the Chinese crackdown on technology companies. In 2021 Chinese regulators froze all licensing activities for new computer games. Now, a year later, good news is coming out. Last week Tencent received its first game approval, “Défense of Health” since regulators froze licensing activities. Game approvals resumed in April, but Tencent and NetEase (a Chinese internet company) only featured in the fifth batch of games approved in September.
The drop in Tencent’s price is not due to anything internally wrong at Tencent. If Tencent had internal problems, it would have been a red flag and a signal to sell the share. But Tencent is still a brilliant company. It is the biggest company in China. The drop in Prosus is also partly the result of the Russian invasion of Ukraine. Prosus acted quickly and decisively. It has ceased all its Russian operations. It is set to write down a $700 million (R10.7 billion) stake in Russia’s biggest internet firm, VK Group. Prosus has also cut ties with its star classified Russian business, Avito.ru. Avito is the second biggest classifieds business site in the world.
Koos Bekker and Tencent: Koos Bekker, chairperson of Naspers and Prosus, has experienced tough times in China before, and he survived. He invested $32 million in Tencent in 2001. The rest is history. Tencent became the biggest company in China. Tencent was well on its way to become the first trillion-dollar company in China. A clampdown on technology companies put a stop to that. Today the market capitalisation of Tencent is around $360 billion. Prosus owns 27.99% ($100 billion or R1.7 trillion) of that. It makes up 85% of the market capitalisation of Prosus.
Buy or sell: The question investors often ask is: “Do I sell Prosus and Naspers, or do I buy more”? There are occasional media “attacks” on Tencent. On 14 March 2022, the Wall Street Journal (one of the world’s leading financial newspapers) reported that Tencent could face a “record fine for violating anti-money laundering rules”. Tencent shares fell nearly 10% on the news but recovered quickly. It is now six months later, and nothing has happened. It seems to be a case of fake news. There are no internal issues at Tencent. We rate Prosus and Naspers a buy.
Geographical diversification: Prosus has built a world-class, global portfolio of attractive assets. Prosus is globally diversified – it now serves more than two billion users globally. The four core divisions are Food Delivery, Fintech (PayU and BillDesk in India), Classifieds (OLX) and Education Technology (distance learning). In the event of political turmoil (like Russia and Ukraine), or economic turmoil (in China), Prosus is sufficiently geographically diversified to minimise the negative effects of most issues. It is also diversified around four big asset classes.
Valuation: The drop in the YTD market prices of Naspers is -6% and Prosus -23%. The net asset value of Prosus is R1,721.30 per share. Prosus is currently trading at around R1,000.00 per share. This relates to a discount to NAV of 41.9%. Prosus is a smart way to buy Tencent. Naspers is trading at a historical average discount to NAV of 49.6%. There is a big margin of safety – the downside risk is limited.
Bottom Line: We feel Prosus, and Naspers, are undervalued. They still have robust growth potential. They are victims of setbacks outside their control – like regulatory clampdowns and Russia’s invasion of Ukraine. There is nothing internally wrong with the companies. China regulators are perhaps doing the right thing and are ahead of the curve. It is possible that other countries can follow the lead set by China. We are not selling our Naspers and Prosus shares.