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Naspers/Prosus shares leap as internet giant Tencent pivots for growth outside of China

Tencent’s Honor of Kings international version will be launched under its new Singapore-based brand Level Infinite, which was formed last year to help Tencent release games outside China.

Tencent’s Honor of Kings international version will be launched under its new Singapore-based brand Level Infinite, which was formed last year to help Tencent release games outside China.

Published Jun 9, 2022


Shares in Naspers and its spin-off Prosus leapt on the JSE yesterday, buoyed by its stake in China’s Tencent after it announced it was release its flagship mobile game “Honor of Kings” globally by the end of the year and as China’s government approved a raft of new game licences.

Shares in global consumer internet group Naspers leapt 9.72 percent to R1 837 in mid-afternoon trade, down 33.71 percent in the past six months. Shares in Prosus, Nasper’s Dutch-listed arm, gained 7.48 percent to R848.02, down 40.84 percent in the past six months.

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Tencent’s Honor of Kings international version would be launched under its new Singapore-based brand Level Infinite, which was formed last year to help Tencent release games outside China.

China’s gaming regulator had not granted any new game licences to Tencent in China since last June. The latest batch of 60 game licences issued on Tuesday did not include Tencent, which is the world’s largest gaming company.

Andrew Dittberner, the chief Investment officer at Old Mutual Wealth Private Client Securities, said: “My sense is that a rising tide lifts all boats. In other words, sentiment is so low in Chinese tech shares that the market clings to any bit of good news.

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“But while through 2021 Chinese tech was all alone, this year the sell-off has been a little more widespread, and Chinese tech shares now appear to be a lot more attractively valued than their US counterparts. And it is perhaps for this reason that we have seen the Chinese tech shares outperform the likes of the Nasdaq in recent months,” he said.

Dittberner said the challenge that Tencent had, which was highlighted at their latest results, was their need to grow outside of China.

“I am not sure if a company can ever outgrow China, but it feels like Tencent has. Their revenue has stalled for the first time, and it is imperative that they get their flagship games released globally,” he said.

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“Importantly, Tencent can be regarded as the Chinese Berkshire Hathaway given their portfolio of listed investments, that can sometimes be overlooked, although they are now valued a lot lower than they were 18 months ago.

“Nevertheless, given their operating business alongside their investments, we view the business as very attractively priced. And finally, their cloud computing business offers another vector of growth,” Dittberner said.

Peter Takaendsa, a portfolio manager and head of equity at Mergence Investment Managers, said: “We believe Naspers and Prosus remain well positioned to grow ahead of most other companies we have listed in South Africa.”

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Consumer and enterprise digital adoption was likely to be a secular growth theme in the key global technology markets that Naspers and Prosus were invested in through Tencent and several other high growth companies valued at more than $30 billion.

“We, therefore, have a constructive view on the long-term prospects of their market-leading technology investments and increasing likelihood of further actions to close the deep discounts the shares trade at relative to the fair value of underlying assets.

“We believe the board and management are aware that market investors are not happy with complicated cross-holding structures between Naspers and Prosus and further actions are more likely to focus on the simplification of the group as well as further alignment of interests,” Takaendsa said.

The risk-reward profile of investing in Naspers and Prosus shares was quite attractive for patient long-term investors although short-term volatility in their share prices was likely to remain high.

While near-term headwinds from the adoption new regulatory measures in China -most are important for industry sustainability – and global technology sector headwinds from rising interest rates remained, “we believe most of these issues are more than priced into the Naspers/Prosus shares that are down over 50 percent from their February 2021 levels and industry fundamentals (digitisation of consumer and business services in fast-growing emerging market economies) remain quite attractive longer term”, he said.

Mike Gresty, an investment analyst at Anchor Capital, said: “I think investors have treated the news of a new tranche of game licences being awarded as more tangible evidence that the risks associated with the regulatory reset that the Chinese technology sector has faced over the last 18 months are beginning to recede.

“This news on gaming approvals strengthens the case that 2H22 is set to be a much better period for Chinese equities. I think the risk premium attached to China’s equities has been increased as a result of what we have experienced recently and will remain elevated for a long time to come,” Gresty said.