Selling Naspers is the right thing to do – but there is a catch

Naspers plummeted by 16% on Monday following the news that Chinese President Xi Jinping secured an unprecedented third term as leader.

The third term broke with tradition and the historical precedent of a two-term limit, making Jinping the longest-serving leader since Mao Zedong.

Other top positions were filled by people loyal to Xi Jinping, which raised concerns that policies which hurt mega-cap tech companies would remain.

Chinese tech companies, including Tencent, Alibaba, JD.com, and Baidu, saw their shares hammered on the news.

Tencent was down 14% on the day, which in turn caused Naspers and Prosus to follow suit because of their exposure to the Chinese giant.

It compounded the pain that Naspers and Prosus shareholders experienced over the last five years.

With the growing uncertainty in China and Naspers management’s inability to create value for shareholders, Sasfin Securities’ David Shapiro said getting out of Naspers makes sense.

He said with Jinping having full control over China, and in effect, companies linked to the Chinese economy, it carries too much risk to invest in the country.

Shapiro highlighted that people who bought Naspers five years ago made a significant loss.

However, there is a challenge for Naspers shareholders who bought the stock many years ago and enjoyed big returns.

Shapiro said that these investors would have to pay 18% capital gains tax on the share price growth when they sell their Naspers shares.

“Investors will have to decide whether it is worth paying the capital gains tax,” he said. “Is the downside justifiable?”

Investors have to decide whether they will make up the capital gains tax by investing the money in another stock. Another consideration is whether Naspers will fall another 20%.

“In normal markets, the answer will be yes. However, in the current market, the decision is more difficult.”

The decision is easier for pension funds which do not have to pay capital gains tax on their trades.

Shapiro said there is nothing to stop pension funds from dumping Naspers and Prosus shares, which he believes is the right decision.

“If pension funds start selling, there is nobody to buy the shares. If dumping Naspers and Prosus starts to gather momentum, it can be very ugly.”