Why there is value in Naspers
There is a lot of debate about the value of Naspers, its investments, its control structure and whether it should be part of your portfolio. Below we will show the significant underlying value, why we believe Naspers is trading at a discount to this value and, lastly, why one should own Naspers in a portfolio.
Naspers is a 103 year old company that has successfully transformed itself from a relatively staid South African newsprint business into one of the larger and more successful internet investment firms globally. Its rapid ascent started when Koos Bekker convinced management in the 1980s to invest in pay TV, then mobile telephony (Naspers was a significant MTN shareholder for a while) and then into a variety of internet-related businesses; the outlier amongst them being Tencent, which has appreciated from an initial $30m investment to today’s $153 billion of value to Naspers.
What is Naspers today and how much is it really worth?
Naspers’s investments and operations can be broadly classified as Video Entertainment; ecommerce; online classifieds; food delivery (and other internet investments); and Tencent. As the segments and companies are in various stages of profitability, a simple PE multiple on the consolidated Naspers earnings would grossly undervalue the potential in some of these businesses. We therefore look at a sum-of-the-parts (SOTP) valuation where each investment is valued individually with an appropriate valuation method.
Video Entertainment – MultiChoice in South and Sub-Sahara Africa. Normalised this business is a >$800m p.a. EBITDA business that should have a valuation of close to R100bn, yet we discount this to R75bn (R175 per Naspers share) to be conservative.
Ecommerce – We conservatively value the remaining assets at R45 per Naspers share on the basis of what they invested.
Online Classifieds has become a significant business globally and Naspers have been one of the early successful investors. We value the classifieds business at R316 per Naspers share (10% of today’s share price), based on the value of Avito and Mail (independently valued through other investors like Vostok) and the metrics supplied by Naspers on gross revenue and margin trends at OLX.
Food delivery and other online ventures. The bulk of the food delivery investment is Naspers’s stake in the listed Delivery Hero, which we value at R25 per Naspers share.
Tencent would have been part of the general "investment" grouping, but this company’s meteoric rise has made it the standalone investment for Naspers. Their holding in Tencent is worth R4,400; much more than the Naspers share price of about R3,100!
What is all this worth together?
Below is our sum-of-the-parts valuation for Naspers. Clearly, Tencent dominates the valuation. It is also noteworthy how much cash they now have at the centre; this is a new development as Naspers only recently sold 2% of their stake in Tencent and their entire investment in Flipkart for cash. This pool is considered enough liquidity to sustain their still early stage investments in more classifieds and food delivery businesses for a number of years, without having to tap the market for more cash.
Is Tencent really that valuable?
We would argue that Tencent is worth even more than the market price, in spite of the current 33X forward PE ratio. The company is expected to grow earnings at 30% per year for the foreseeable future, making this PE multiple very palatable. A very logical question to ask would be; "how do you grow 30% per year for another couple of years if
you already have >1bn of the Chinese population signed up as customers?" We argue that they will not grow through adding more customers; they pretty much have the whole of China registered for one or more of their services. One has to look at the level of monetisation; that is, how much money do they make off each customer for each service being used.
On social networks they only generate about $2 per quarter per monthly active user. Facebook, a very similar service, generates $30 per quarter.
Additionally, Tencent don’t charge for most financial transactions below a certain threshold value, and most new mobile games are free to play, even the more challenging games. Where they do charge for games or in-app purchases, it’s turning out to be more profitable than with the traditional PC games – a recent example is QQ Speed that generates 7X more revenue per game on mobile devices than it did on PC. Fortnite, the latest global craze in online gaming, is free to play, yet it grossed $223m in February alone from in-game purchases.
Lastly, Tencent has built a significant investment portfolio over recent years; including companies who they hope to learn from (like the 5% stake in Tesla), and companies where they specifically want part of the action, but want to leave founder management in charge so as not to detract from the original chemistry (like their 40% stake in Epic Games, the developer of Fortnite). This portfolio is currently worth about $33bn, or RMB20 per share.
Space limits us from elaborating more on the incredible business model of Tencent, but it should be clear that they still have many levers of growth left and hence one can easily justify a share price in excess of HKD500 (spot share price is around HKD400).
The chart below shows the strong revenue growth at Tencent in recent years. The scale goes from RMB22.4bn on the left to RMB73bn for the most recent quarter.
Why is Naspers trading at such a discout?
Naspers trades at a 40% discount to its sum-of-the-parts valuation (assuming all listed investments are at fair value). This seems excessive, given that all their listed investments are liquid enough so as to enable an orderly exit for Naspers.
- One reason is that SA institutional shareholders have become forced sellers; as the share price appreciated, Naspers has become so big in SA portfolios that managers could no longer stomach the portfolio construction risk. In addition, most mandates and/or prudential limits prohibit such a large position.
- Foreign investors can invest in Tencent directly. If they are sceptical about Naspers’s ability to generate meaningful value in the rest of the portfolio, they could simply invest directly in Tencent.
- Simple holding company discount. If Naspers were to dispose of its entire Tencent position, it will most probably have to be at some discount to the prevailing market price as they hold 31% of the shares. The same will hold for the unlisted investments.
What is the VIE structure that sceptics talk about?
China’s Ministry of Commerce (MOFCOM) trifurcates industries into encouraged; restricted; and prohibited from foreign investment, depending on the sensitivity of the industry to China’s developmental and social cohesion goals. Initially, some arrangements were made by foreign investors to circumvent these restrictions. However, as industries have developed, MOFCOM has also advanced their approach to the point where one form of circumvention, the Variable Interest Entity (VIE) is now actually being vetted and licensed by MOFCOM. The Hong Kong listed Tencent (registered in the Caymans) owns its interest in the mainland China Tencent through such a sanctioned VIE structure, where Tencent Hong Kong shareholders have a contractual right to the financial interest of the mainland Tencent, as opposed to a traditional shareholding. It is a known, declared and licenced structure. At present there are well documented moves afoot to gain more direct listings onto the Chinese market. Inward listings of some of these VIE structures are part of the plan to achieve this goal.
We therefore believe that Naspers’s investment in Tencent (via the Tencent Hong Kong listed entity) carries no more risk to investors than a more traditional direct shareholding.
Why should SA shareholders hold Naspers and how much is enough?
In an ideal equity portfolio, you want a diversified group of relatively uncorrelated equities that each provides a solid investment case. We argue that SA Shareholders should most definitely hold Naspers, because of its attractive valuation, fundamental business drivers that are uncorrelated to the SA economy and its unique portfolio diversification properties.
We’ve demonstrated above that Naspers trades at a significant 40% discount to the market value of its investments. Whereas we would like to believe that this discount will narrow over time to a more normalised 20% holding company discount, our investment thesis is not based on this hope. We believe Tencent is worth much more than its market price and, as Naspers have clearly demonstrated with their profitable disinvestments a number of times, the rest of the portfolio also has more upside.
For an SA investor that cannot hold offshore equities directly, Naspers brings a range of diversification benefits.
- The bulk of its assets are outside South Africa, earning non-rand income.
- It offers direct exposure to all things online in the fastest growing large economy, China.
- It offers very fast-growing earnings on account of Tencent’s growth and the rapid move from start-up losses to profitability in its other online classifieds assets.
- All of the above is very much uncorrelated to whatever happens in the SA economy – very important from a portfolio construction perspective.
The actual size of the position would be a function of the portfolio’s mandate and risk profile. In the case of the Nedgroup Investments Rainmaker Fund, which is a purely South African domestic equity fund we have a position of 13.7% (May 2018). This is our single biggest position within the fund, but we view it as appropriate given the growth prospects of the company, rand hedge qualities, discount to fair value and the diversification advantages of the business.
The Nedgroup Investments Opportunity Fund has a more conservative mandate, and as such, we have a position of 9.7%. We also have three protection policies against a falling Naspers share price. In total 95% of our shareholding has some form of insurance over it.
The protection levels are as follows:
R3,200 to R0 (21% of shareholding)
R2,940 – R2,475 (51% of shareholding)
R2,800 – R2,350 (23% of shareholding)
Naspers remains one of the top global companies, with investments in some of the fastest growing markets and industries.