TENCENT’S share price in Chinese renminbi (or yuan) grew by about 29 percent per year over the past 11 years. Picture: Bloomberg.
TENCENT’S share price in Chinese renminbi (or yuan) grew by about 29 percent per year over the past 11 years. Picture: Bloomberg.

With the outlook for Tencent blurred, it is steadily becoming Naspers’s nemesis

By Opinion Time of article published Jul 28, 2021

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TENCENT’S share price in Chinese renminbi (or yuan) grew by about 29 percent per year over the past 11 years.

Ryk de Klerk

TENCENT is and was a massive success story for Naspers. Tencent’s share price in Chinese renminbi (or yuan) grew by about 29 percent a year over the past 11 years.

Naspers boosted the value of savings of many citizens and especially that of government employees through the Government Employees Pension Fund (Gepf) and ensured healthy growth in pensions.

At the end of the 2019/20 fiscal year, more than 15 percent of the Gepf’s total investments consisted of Naspers and its subsidiary, Prosus.

The outlook for Tencent and Naspers is blurred, though.

Naspers’s effective holding in Tencent Holdings is about 22 percent through Prosus. At Friday’s closing price of 598.5 Hong Kong dollars and an exchange rate of R1.82 to the Hong Kong dollar, Naspers’s holding in Tencent was worth R2.263 billion.

In comparison, Naspers’s total market capitalisation was R1.28bn – meaning that Naspers traded at a discount of about 43 percent to its underlying value in Tencent.

The discount seems high, but in my experience a 20 to 30 percent discount to the market value at which holding companies trade to the market value of their underlying portfolio of net assets is not uncommon.

Various factors such as the size and liquidity of the underlying assets, and potential tax on the disposal of the assets may have an impact on the net realisable value.

There is always the question among investors and analysts of how to value the fast-growing tech companies such as Tencent.

It is an impossible task to calculate and forecast earnings. Furthermore, what future PE (price-to-earnings) multiple do you use to calculate a fair value for the share?

The book value of a company is the total value of a company, should they decide to liquidate the company. It is equal to the total assets minus total liabilities, in other words net asset value or shareholders’ interest.

Changes in the shareholders’ interest, in fact, reflect the financial health of the company as shareholders’ interest encompasses the company’s reserves, equity and retained earnings.

Growth in shareholders’ interest gives me a better idea about tangible growth than earnings growth. I therefore analysed Tencent by using the price-to-book ratio.

Tencent’s shareholders’ interest grew from 12.2bn renminbi in 2009 to 432.7bn in 2019. The growth pattern was such that a perfect curve can be fitted.

I excluded 2020’s number as I am of the opinion that the coronavirus led to an exceptional boost in profits.

If the trend in shareholders’ interest continues, it is likely that Tencent’s shareholders’ interest may more than double by the 2025 financial year, but year-on-year growth will slow to about 20 percent in 2025.

Tencent’s price-to-book ratio as measured by the company’s market capitalisation relative to its shareholders’ interest has been in a declining trend since 2009.

It is particularly evident since 2013 with 2017 the exception due to market hype.

Yes, Mr Market has virtually downrated Tencent in a straight line. Tencent is currently trading at 6.6 times 2020’s shareholders’ interest and at 6.15 times 2021’s if the historical trend in shareholders’ interest holds.

The biggest threat to Tencent shareholders is that, if the downtrend in the price-to-book ratio continues, the price-to-book ratio could fall to 3.3 by 2025, resulting in a de-rating of about 50 percent.

Perhaps Tencent’s management may do something special to convince Mr Market to stall the downtrend. But in the absence of that it seems that by 2025 Tencent’s share price could be about 558 renminbi or 672 Hong Kong dollars at an exchange rate of 1.2 Hong Kong dollars to the renminbi.

That compares to Tencent’s price of 598.5 Hong Kong dollars at Friday’s close.

Tencent’s growth in shareholders’ interest is also threatened by what was aptly described by Bloomberg over the weekend:

“So it goes across big tech in China, where freewheeling, internet-age capitalism, and the wealth and influence it brings, has collided with the aims and ambitions of the Chinese Communist Party. What regulators describe as ‘rectification’ is under way, and it’s also affecting the finance operations of Tencent.”

Yes, China wants to assert control over big tech companies.

It is clear to me that Tencent has lost its glamour as a growth stock. And so has Naspers.

With the outlook for Tencent blurred, it is no wonder that Naspers is trading at such a huge discount. I think that Naspers’s board of directors is fully aware of the prospects of Tencent. The only way forward is to attempt to narrow the discount at which Naspers is trading to its investment in Tencent and to pursue growth opportunities elsewhere to reduce the impact of Tencent on its financials and outlook. Yes, Tencent is becoming Naspers’s nemesis.

Ryk de Klerk is an analyst-at-large. Contact [email protected] He is not a registered financial adviser and his views are his own. He does not have a direct interest in the companies mentioned. You should consult your broker or investment adviser for advice. Past performance is no guarantee of future results.

BUSINESS REPORT ONLINE

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