Naspers: Substantial Revaluation Of Tencent, Not Worried About South Africa

seekingalpha06-05

Naspers' performance is determined by Prosus whose performance is determined by Tencent.Tencent has recovered from intense negative sentiment in 2023 and early 2024, revaluing Naspers nicely.Naspers ...

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South Africa\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-06-05 02:16 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4697393-naspers-substantial-revaluation-of-tencent-not-worried-about-south-africa><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Naspers' performance is determined by Prosus whose performance is determined by Tencent.Tencent has recovered from intense negative sentiment in 2023 and early 2024, revaluing Naspers nicely.Naspers ...</p>\n\n<a href=\"https://seekingalpha.com/article/4697393-naspers-substantial-revaluation-of-tencent-not-worried-about-south-africa\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU0315178854.USD","symbol_name":"EASTSPRING INVESTMENTS ASIAN EQUITY INCOME \"A\" 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They may have to let more extreme parties into a coalition.Expropriation in South Africa could become policy one day, but probably not for now. At any rate, it would be focused on land, and Prosus is based in Europe. Naspers shareholders should be secure.Even if Naspers' discount to Prosus makes sense based on political risks, it doesn't eliminate tangible benefits from buybacks and other distributions that Naspers may do. It is compelling.   nattrass Naspers Limited (OTCPK:NAPRF)(OTCPK:NPSNY) hasn't released any new financials, so our previous initiating coverage on the company is still the best reference for their current portfolio makeup, with an updated mark-to-market valuation provided below. Thankfully, Naspers is not that exposed to the political uncertainty in South Africa around the elections on a technical basis, which can be captured by the iShares MSCI South Africa ETF (EZA) which features Naspers meaningfully as a major component of that market. A large amount of Naspers' value comes from Tencent Holdings Limited (OTCPK:TCEHY), whose performance over the last couple of days probably has more to do with its movement down, although markets do apply some penalties on Naspers it seems for being a South African listing. Since our last coverage though, Tencent has risen significantly, and we think other concerns have also been assuaged within their primary holding, Prosus N.V. (OTCPK:PROSY), which is not based in South Africa. We still think Naspers is a buy as Prosus shareholders seem only willing to own Tencent at a bigger discount than before. Political Turmoil in South Africa Both the ZAR and the general South African market have taken a hit on account of the elections in South Africa which have been of concern, recovering somewhat but showing volatility. Data by YCharts Naspers is relatively correlated to the South African market as it is a large component of it, but fundamentally it is connected more to Tencent which dominates the portfolio of Prosus, and whose performance recently tracks closely to the EZA. However, it is still clear from the above chart that Naspers doesn't end up following Tencent 1:1, even though it should based on the fact that the Naspers portfolio is indirectly dominated by Tencent. So the market does seem to take the South African idiosyncrasy into account, which makes the politics worth discussing. Correlations (Portfoliovisualizer.com) The ANC has lost its majority. Some of those votes went to the DA which is the more Western and less extreme of the parties. They have been critical and opposed to the ANC's left-leaning policies, and are generally supportive of the white minority interests. But a lot of the ANC votes were lost to a new party formed by former ANC-backed President Zuma, who's been banned by courts from running in elections. He's been accused of alleged corruption related to an arms deal in 1999 and was sanctioned for not attending the trial. A DA-ANC coalition would be the ideal outcome for financial markets, evidenced also by reported pre-election political donations by Naspers to each of the parties. But we don't think that coalition is likely, as the DA has been opposed to some non-negotiable ideas that the ANC supports, including things associated with making South Africa a welfare state, and other left-leaning policies. More likely is that the ANC will get the remaining votes for 50% from parties that the market would approve less of, in the worst case from a party whose leaders advocate for the seizure of land, much like what was done in Zimbabwe. To expropriate land incidentally from Afrikaner farmers without compensation would require a constitutional change which isn't achievable between ANC, EFF, and the MK alone as a two-thirds majority is needed. Thankfully, the DA carries 22% of the votes, and the ANC itself isn't really in favor of changing the constitution in such a way for now, although it believes that the distribution of land is a source of grievance for its constituents. Our position is that expropriation, which we consider to be extremely detrimental for the country, isn't likely to happen this cycle, but to the extent that is permitted by capital control laws in South Africa, the rich minority are likely going to be selling the ZAR and moving it into other countries like Ireland as quickly as they are able in our opinion. We believe ZAR and the South African market will be perennially under some selling pressure, which means it's a good thing that at least Naspers' assets are not ZAR-denominated. Some think that a minority coalition led by the ANC might be formed in order to avoid having to formally band together with the more extreme parties. The implications of this would mostly be good. In addition to the ZAR losing around 4% of its value over the last couple of days against the USD, South African stocks have clearly come down several points from pre-election close levels on account of the questions around the government. In general, there will be some volatility as the markets wait to see what happens with possible coalitions. But the really terrible outcomes like expropriation are not in the cards at the moment. Nonetheless, we agree at least in part with what appears to be a penalization of Naspers for being in South Africa. On Naspers As far as Naspers is concerned, as detailed clearly in our last article, the majority of the value comes from Prosus which is fully based in Europe. Therefore, we believe there isn't much direct risk in the event of political turmoil that might see the government try to take control of the company, since its value all originates from one place outside of South Africa, and Naspers shareholders could probably be guaranteed their second order ownership of Prosus without too much trouble by moving to a market or doing a spin-off of a holding company with Prosus within it on another market. The Prosus portfolio already being segmented off in a European holding is likely a measure to be able to react in an extreme scenario. There isn't much else in Naspers that a shareholder would miss in the event of a scramble. We don't think any of this is necessary anyway, as the situation is still pretty tame as of today. Moreover, there are benefits to Naspers being discounted, which is that any distribution of assets or buybacks it does of its listing will be highly accretive. There is great value in that for shareholders at the moment in our view, and the company seems aware of its NAV discount and will likely buy back as much as possible while it persists.   Valuation (VTS) Naspers has revalued significantly since our last coverage, by about 15%. The reason for this is a major improvement in Prosus's valuation which is up by about that much as well due to a revaluation in Tencent, where there was a dissipation of acute concerns around Chinese regulation of gaming companies. Tencent, a major part of the valuation of Prosus, has also found some of its stride again with a new game hit in Dungeon and Fighter, and has performed well in their other businesses which gained momentum and lifted Tencent's margin profile despite pressures in the Chinese economy. In general, the unfreezing of video game approvals, where in China video games need to be approved before they're released, has been of help as well. The important thing was the insiders at the government didn't seem to approve the further draft of the rules in December that would attack video game company monetization models, particularly in the popular gacha game market. This rationalization of government policy that has been clearly on trend to clamp down on the video game industry has been essential for recent performance. Additionally, in our Naspers valuation, you can see that Stack Overflow is a significant part of the Prosus Venture Portfolio. We were quite concerned about the valuation of Stack Overflow as it might be subject to disruption with the emergence of large language models, where coding co-pilots have already become very useful. However, being traditionally the go-to destination for open-sourced code fixes and example codes, with the entire website reflecting the prompt-response system of the most widespread LLM applications, it was able to secure a deal with OpenAI to monetize its valuable data with an API agreement. This was met with some protest at first, but for better or worse Stack Overflow is likely going to still be a premier destination for community code help, and their content is pretty valuable to LLMs that are looking to provide specific help to coders. We would be more confident in their valuation at this point despite the general grief in VC, which might partly explain the valuation gap. Bottom Line While a lot of Prosus value is tied up in Tencent, and a valuation gap there can somewhat be expected where Prosus shareholders may not be willing buyers of Tencent without a certain discount and the VC portfolio value is always questionable, Naspers is still a deep value play with Prosus valued mark-to-market, discount and all. Political turmoil is a possible reason for volatility in Naspers which is listed in South Africa, but we don't believe that Naspers fails as a security. While we share the political concerns, we still think that the discount Naspers may be getting to Prosus as a result should be ignored due to the benefits that it will have in distributions and buybacks. In general, Naspers shareholders should be more focused on the condition of stocks in China and the actions of the CCP, and there are likely actions Naspers could take in the event that the domestic political climate gets nasty to secure their stake in Prosus for shareholders in the JSE. On the basis of both the technical Prosus discount, which has materially grown since last time reflecting Prosus shareholders needing a discount to own Tencent, but also of the discount between Naspers and Prosus, Naspers remains an attractive idea.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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