Naspers’ ‘Tencent problem’ just got bigger – and could be trouble for the JSE as a whole

• Naspers owns a third of Tencent, the fastest-growing internet company in the world.
• Analysts are predicting that its stake, currently valued at R2.2 trillion, could be worth R600 billion more in a year's time.
• But Naspers is already trading at a massive 30% discount to the value of its stake in Tencent.
• This implies that all of its other businesses are not worth anything,
• As Naspers represents 20% of the JSE, its current rally is good for index investors. But the tide could turn.

It’s called Tencent. 

And it’s a great problem to have. 

Naspers owns a one-third stake in the fastest-growing internet company on the planet. 

It paid just $33 million for its stake in Tencent in 2001. Those shares are now worth R2.2 trillion – and could be worth R600 billion more in twelve months from now if investment bankers who have just upgraded their price forecasts for the company are right. 

And yes, it’s a problem.

Naspers bought its Tencent stake as the world fell out of love with technology companies when the dot-com bubble burst. The Cape Town based company, which had lost billions on a slew of failed investments in China, was on the brink of withdrawing from that market.

This week Goldman Sachs revised its price target for the Chinese owner of games like Clash of Clans by 22% to $535 a share twelve months from now. That is the latest in a long line of price upgrades for Tencent, which has not seen a single analyst recommend a “sell” on the stock in more than two years. 

Tencent is currently worth about $553 billion. The new price target means Goldman Sachs believes it could be worth nearly $700 billion within a year.

At the current price, Naspers' one third stake in the Shenzen headquartered company is valued at around $184 billion, or R2.2 trillion. But there is a big gap between the value of its Tencent stake and the total value of Naspers on the JSE, which currently sits at about R1.5 trillion. 

So Naspers is trading at a massive 30% discount just to the value of its stake in Tencent, implying the value of the balance of all Naspers businesses across the world, including pay-TV business Mulitchoice, Russia’s Mail.ru, Brazil’s iFood, and incidentally, this website (part of the Media24 stable), are worth less than nothing.

This is a patently ridiculous notion. 

In December Naspers CEO Bob van Dijk said the group would consider what he called “structural options” to deal with the growing gap in the value of the rump Naspers relative to the value of its stake in Tencent.

He previously acknowledged that the gap is just too high. 

Naspers has avoided the temptation to move its primary listing from the JSE as that would make it vulnerable to a hostile takeover. If you bought the whole of Naspers today, it would mean you would be buying a third of Tencent for 30% less than the ruling market price in Hong Kong. Many investors in Naspers would like to see the company sell its Tencent holding and distribute the cash. The company has so far resisted that pressure, but it must be getting increasingly hard to do.

Naspers was the top performing share on the JSE last year with the stock rising at one point to more than R4,000 a share. It gained 74% during 2017, compared to the 109% gain in Tencent.

It turns out that the Naspers gain is good for all investors on the JSE.

Naspers makes up more than 20% of the total value of all the shares listed on the JSE courtesy of its Tencent investment. That’s great while Tencent goes up. It becomes a problem, particularly for index investors, should the company fail to meet market expectations and fall. Naspers’ weighting on the overall market as a result of Tencent means any significant downturn for the Chinese company will be felt in the value of the  JSE. 

But that’s only a problem, if, and when it happens.

Bruce Whitfield is a multi-platform award winning financial journalist and broadcaster. He is a sought after public speaker on the political economy.

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