Naspers’ Tencent problem

Prosus has been selling its stake in Tencent to fund a stock buyback in itself and parent Naspers to reduce its large discount to its net asset value.

However, many analysts are not convinced that Naspers and Prosus’ other assets – eCommerce players with a focus on food delivery – are worth much.

Naspers historically traded at a discount of between 35%-40% to its net asset value per share (NAV).

In simple terms, this means that the assets held within Naspers are worth more summed individually than what the market values Naspers at.

It is not uncommon for conglomerates – companies that hold many businesses within their structure – to trade at a discount to their NAVs.

A common reason for the discount is that the market believes that the conglomerate’s leadership is incapable of managing the individual companies as well as if they were individually run.

It can cause management to create value destruction for shareholders and diminish the conglomerate’s outlook.

Another reason for conglomerate discounts is that they have complex structures that are difficult to understand.

Naspers is guilty of both.

Naspers’ management has tried to close the discount on its share price and has implemented various strategies to achieve this goal without much success.

The most perplexing attempt was in 2019 when Naspers announced it would spin off all of its offshore internet assets into a separately listed company – Prosus.

It did not work, and it is now stuck with two conglomerates with a complex structure and Prosus trading at a 35% discount to its NAV.

Naspers and Prosus’ Tencent problem

The most significant holding in the Prosus portfolio is its investment in Tencent. The company holds 2,614 million Tencent shares, equivalent to R1.72 trillion.

The Tencent investment is the driving force behind Naspers’ success and created significant value for the group and its investors.

However, many investors feel that Naspers and Prosus have not made great investments after the Tencent acquisition.

They want Naspers and Prosus to unbundle their Tencent position to unlock shareholder value. It is unlikely to happen.

If Naspers, through Prosus, sells its Tencent stake, the company would be a shadow of what it is today.

This is why Naspers’ management has thus far not shown any willingness to unbundle its stake in Tencent.

Prosus with and without Tencent

To illustrate how important Tencent is to Naspers and Prosus, Daily Investor looked at Prosus’ profit with and without the Chinese Internet giant.

The Prosus portfolio’s trading profit has been increasing since it was listed in 2019, with a $5.2 billion trading profit in the 2022 financial year.

This significant trading profit suggests that Naspers and Prosus made good investments and continued acquiring profitable companies.

However, delving into the numbers showed that the opposite is true.

When Tencent’s trading profit was stripped out of the Prosus portfolio, it revealed huge losses from its eCommerce investments.

Prosus’ portfolio without Tencent is deteriorating, with its most recent annual result reporting a record $1.1 billion trading loss.

With mounting losses from its eCommerce operations, it is easy to see why Prosus and Naspers are trading at a discount and why many analysts want Tencent to be unbundled.