Tencent exposure may be cheaply available in Joburg after Naspers listing
South Africa free float rules may create a bargain opportunity for investors to get exposure to Chinese tech giant Tencent once Naspers lists its stake in Johannesburg and Amsterdam in July.
One of the aims of the Naspers listing is to find a way around the weight of the company’s market capitalisation in South Africa, which limits the amount of stock that index-tracking fund managers are able to hold. Naspers’ weight in the main Johannesburg index has often exceeded 25%, with many funds not allowed to have more than 20% or 25% in a single security.
That difficulty is not entirely resolved by the Naspers plan to list its Tencent holding and other non South African investments in a separate NewCo, Travis Lundy, an analyst with Ballingal Investment Advisors in Hong Kong, wrote in two pieces of research on Smartkarma on June 6.
Lundy points to a statement from the Johannesburg Stock Exchange on March 25 that the index free float for inward listings typically excludes any shares held on a foreign share register.
- That means that NewCo shares traded in Amsterdam will not be included in calculations of the South African float, forcing local index sellers to offload allocated stock.
- Lundy calculates that only about 158m NewCo shares will be counted, of which index funds will own 114m.
- South African index funds may need to sell 60m or more NewCo shares to stay within their exposure limits, he argues, creating the potential for a profitable “big trade.”
Lundy points to the tax advantages of the NewCo structure for all holders, which originate with tax treaties between South Africa and the Netherlands.
- If NewCo sells assets and distributes the proceeds to shareholders, this would count as a capital return rather than a taxable dividend.
- Provided that Naspers keeps a stake of 70%, NewCo could sell and distribute most of its assets to investors tax-free, Lundy argues – including in South Africa.
These advantages mean that “any reasonable person should want to own NewCo” rather than Naspers, Lundy says. Yet NewCo shares may be cheaply available in Johannesburg due to index fund selling. “The ‘lucky’, the few, the aggressive will make sure to own NewCo” rather than the alternative of taking Naspers shares, Lundy writes.
The last day to trade in Naspers ordinary shares to be able to participate in the capitalisation issue is July 16, with the listing of NewCo shares in Johannesburg and Amsterdam set for July 17. Note also that it is possible to transfer shares purchased in Johannesburg to Euronext.
Bottom Line: Watch for signs of a discount in NewCo’s Johannesburg-traded shares compared with those in Amsterdam.