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Thursday, August 11, 2022

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'Exuberant market' welcomes Prosus/Naspers’ surprise move to whittle down Tencent stake

Naspers said Tencent was supportive of the withdrawal by Prosus of its voluntary restriction on the sale of its Tencent shares.

Naspers said Tencent was supportive of the withdrawal by Prosus of its voluntary restriction on the sale of its Tencent shares.

Published Jun 28, 2022


An "‘exuberant" market yesterday welcomed Naspers’ surprise announcement that through its international investments holding firm, Prosus, it was reducing exposure to China through selling down interests in tech giant Tencent.

This despite analysts saying yesterday that the tech sector regulatory risks in the Asian giant are receding.

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Naspers, through its international investments holding firm, Prosus, traded 24 percent stronger, while Prosus’ stock was 17 percent higher towards the end of yesterday’s session after the announcement and as it released its annual results.

The e-commerce segment of Prosus lifted revenues for the year to the end of March 31 by 51 percent to $9.8 billion (R155bn), while Naspers’ e-commerce income was 49 percent higher at $10.7bn.

Naspers confirmed yesterday that Prosus would “begin selling small numbers of ordinary shares in Tencent Holdings Limited regularly”, while also “purchasing Prosus shares and Naspers shares”.

Naspers said Tencent was “supportive of the withdrawal by Prosus of its voluntary restriction on the sale” of its Tencent shares.

“Investors have been banging on Naspers/Prosus management’s doors for years to drive a focus on narrowing the large discount, which explained Monday’s exuberant market response,” Sameer Singh, a research analyst with Old Mutual Wealth Private Client Securities, told Business Report.

Singh expects that it would take 335 trading days to sell down 4 percent in Tencent, resulting in the generation of around $50 million of proceeds per day.

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“[This] highlights that management are keenly aware of their (investors) concerns. As much as Naspers/Prosus are losing an attractive, long-term investment, they are also de-risking their portfolio while opening up opportunities for better value realisation and creation from their existing portfolio,” explained Singh.

Naspers also announced that it recently earned about $3.6bn from the disposal of its shares in – another e-commerce company from China – with funds from this set to be “retained for general corporate and liquidity” purposes.

The disposal from and Prosus’ selling down of its interests in Naspers has fuelled speculation that Naspers is reducing its exposure to Chinese tech and ecommerce companies owing to regulatory hurdles tech companies are facing in China.

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Proceeds from the downsizing of Prosus’ investment in Tencent will nonetheless be used to liquidate share buyback schemes by Naspers and Prosus.

Mike Gresty, the chief investment officer at Anchor Capital, said yesterday that although the possibility of a share buyback by Prosus and Naspers was high, the “ability to sell down Tencent to fund it” was largely “not” expected.

“This is big news and creates the potential for Prosus/Naspers to raise sufficient cash to have a meaningful impact through share buybacks,” Gresty said.

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Furthermore, the trading performance by Prosus and Naspers after the announcement of the share buyback and the down trending of investment in China was unlikely linked to concerns over China’s regulatory focus on tech companies, added Gresty.

“Investors are increasingly of the view that the risks around China’s regulatory re-set are receding and China’s authorities are aware, given the importance of its technology sector for economic growth, China’s targets for economic growth are unlikely to be achieved this year if it continues to hit the sector with further regulatory change.”

However, added Gresty, it was not certain “whether this is a temporary halt in regulatory change until the all-important China Communist Party conference in late 2022, or a more long-term shift towards better management of regulatory change” in China.

Prosus said that going forward, and as a way of living up to market realities and conditions, “investment will be balanced with a focus on reducing costs and driving profitability in the core” and setting even higher targets for M&A returns.

The company aims to bring its lucrative e-commerce portfolio to profitability. Naspers on the other hand, said it would continue with its “disciplined investment into scaling out growth adjacencies to build bigger and more valuable businesses”, which have “good traction with consumers and high potential to generate sustainable returns” over the long term outlook.