(NPSN.L) Naspers: Buy Tencent 50% off
How a complex corperate and voting structure create insane discounts.
'This piece is an opinion and for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.'
In 2001 the South-African media conglomerate invested $32 million in a small startup called "Tencent" resulting in 32.8% stake in the company. Tencent would become one of the biggest tech companies in the world. While Naspers has reduced their stake to 28.9% to fund other venture capital campaigns, one can acquire that stake for a huge discount compared to the current price of Tencent. This discount exists due to confusing corporate and voting structures, and legit concerns about the management. While these concerns have merit, the discount of Tencent and their other investments are too high to ignore.
Overview of Tencent
The biggest stake of Naspers and the reason why the discount is so compelling is Tencent. Founded in 1998 it's Chinese offerings, most famously WeChat, are as though Facebook, Nintendo, Shopify, Spoify, Netflix, Slack and Paypal were rolled into one. WeChat alone has more than 1.2 billion users worldwide, making it one of the biggest social networks that ever existed.
But Tencent has much more going for it than it's own products. Through investment in both domestic and international companies, that are so successful it sometimes gets called "The SoftBank of China" or "The Berkshire Hathaway of Tech", it has built a huge international media conglomerate.
Some companies are fully owned subsidiaries like Riot Games (League of Legends) or Supercell (Clash of Clans), in others it has a non-controlling stake. These include both public and private companies. These include 20.1% of Meituan ($225.1b marketcap), 25% of Sea Ltd ( $124.8b marketcap), 17.1% of JD.COM ( $117.4b marketcap), 40% of Epic Games (creators of Fortnite) and small stakes in Tesla, Activision-Blizzard, Nio, Snapchat, Universal Music, Spotify, Discord, Ubisoft, Reddit being just the tip of the iceberg.
All these investments gave Tencent a market cap of $740.95 billion in May 2021, making it the 7th largest company in the world and the biggest in China by market cap. With big tailwinds from China and advancements in technology and increasing popularity of it's games it is poised to grow more. While Tencent certainly isn't expensive for it's growth, as a value investor I find it hard to pay a premium for a great company, fortunately we don't have to. The 28.9% stake from Naspers would imply a market cap $214.13b, however as I previously mentioned it is not that easy .
Prosus
Prosus is the international internet assets division of Naspers. It is publicly traded on the Amsterdam Stock Exchange and has a market cap of €146,19b ($177.58b). Not only does it includes Tencent stake, it also has stakes in other companies and startups - that requires further breakdown.
The graphic is from the annual report 2020. Since then Prosus sold part of their Tencent stake, reducing their ownership to 28.9%.
Using the current market cap of Tencent, that stake alone is worth $214.13b, the current price of Prosus $177.58b (€146.19b) already gives us a discount of 20%, but it gets even better.
While Prosus has some debt it has enough cash to cover it, us a net-cash position of $4.45b.
It also has a 21.2% stake in Delivery Hero ($37.39b market cap) and a 27.9% stake in mail.ru ( $4.763 marketcap), increasing the value of Prosus by $9.24b.
Adding their stakes in private companies and ventures such as udemy, they can be valued at $25b if a 7.5x revenue multiple is applied.
That would give us a 42% discount to the Net Asset Value, but through the complexity that is the Prosus-Naspers-Tencent construct, we can increase the discount even further.
Naspers
Naspers has several venture capital initiatives in it's origin country South Africa and a 85% in Media24 - one of Africa's leading print and digital media groups. What is more important is that Naspers owns 72.49% of Prosus and is also publicly listed on the Johannesburg Stock Exchange. While I can’t invest in the JSE there is an ADR on the London Stock Exchange.
In May 2021, the LSE listing of Naspers had a market cap of £75.18b, which is $105.25b. As the market cap of Prosus is $177.58b, 72.49% of that should be $128.72b. Even if we discount Media24 completely, we would have an additional discount, bringing it to more than 50%.
Reasons for the discount
The layered structure and the occasional selling of Tencent stock to fund venture capital investments gives a lot of analysts reason to worry. Add an absolutely ridiculous complex voting structure, where Naspers always has the majority of voting rights, no matter how many Prosus shares and also discounts the votes of Napsers shareholders, the reason for the discount become clear.
Closing the discount
While there is no clear catalyst when the discount will close, both Naspers and Prosus are buying back shares in their 2020-2021 share buyback-program.
Prosus will repurchase shares for $1.37b from it's free-float (increasing Naspers position) and Naspers will repurchase shares for $3.63.
While I don't think that the discount will fully close due to the complexity and shareholder hostility, I think that it will narrow in the future.
With Tencent, Delivery Hero, mail.ru and several venture capital investments that start to gain traction (udemy, codecademy), the combination of the underlying companies and the narrowing of the discount offers a an attractive price for the underlying assets.