Beijing and Tencent are putting Naspers under increasing pressure

By Julien Clémençot
Posted on Thursday, 27 January 2022 07:41

Bob van Dijk, CEO of multimedia giant Naspers, in Johannesburg, 9 October 2019. © REUTERS/Siphiwe Sibeko

The South African group Naspers has completely transformed itself after investing early in the Chinese giant Tencent. However, in recent years, the latter's success has created problems. The Chinese authorities, by attacking digital players, have complicated matters.

More than ever, Bob van Dijk, CEO of South Africa’s Naspers, finds himself on the front line of the financial markets. The largest capitalisation on the Johannesburg stock exchange ($76bn) and its subsidiary, Prosus, which is listed in both Amsterdam and Joburg, have seen their share prices fall for almost a year (respectively -25 and -23%), yet their results are largely positive.

Naspers made a profit of $5.3bn during the last financial year ending March 2021 (on sales of $29.6bn). With no real solution in sight, the leader took a gamble in early January by personally buying around 155m rand worth of Prosus shares in order to restore investor confidence.

Taking control

From analysts’ point of view, van Dijk’s group is too dependent on the results of China’s Tencent, in which it holds 29% and which has made it one of the world’s largest tech investors. At the end of September, its capital was valued at a discount of more than 60%, compared to the real value of its assets. Additionally, Beijing’s brutal takeover of the digital economy since the second quarter of 2021 complicates the situation even more.

In July, the Chinese government first banned companies in the edtech (education technology) sector – in which Naspers has invested – from receiving foreign funding and issued new rules limiting their ability to make profits. A few weeks later, Tencent was forced to give up signing exclusive contracts with music copyright holders. The authorities then announced that they wanted to limit the amount of time that minors spend playing video games, one of the Chinese giant’s major sources of revenue.

Finally, fines were imposed on the Chinese giant for false declarations to the authorities. Although these sanctions have no financial consequences, they confirm the Communist Party’s desire to bring digital champions to heel. Tencent did not escape unscathed as it has lost more than 30% of its capitalisation in one year.

For investors, this bad news raises the question of whether Naspers can pay large dividends to its shareholders in the coming years. This is a bitter pill to swallow for a group that has delivered an exceptional return on investment over the past two decades.

Decisive turnaround

Even so, is this incredible performance still achievable today within a context of tightening Chinese policy? Many fund managers don’t think so. This is hard to take for a company that has demonstrated – on several occasions in its recent history – its ability to reinvent itself in order to make a profit.

Created in 1915, Nasionale Pers, which officially adopted the name Naspers in 1998, remained a traditional press group – which was also very conservative, since it supported apartheid and remained close to the Afrikaner elite for a long time – for nearly 70 years. Its first decisive turn was taken in the mid-1980s when – as per the proposal of Koos Bekker, its current chairman – it invested in the establishment of the first African pay-TV operator.

After a hesitant start, M-Net, which gave birth to Multichoice, became a real success story. The Naspers subsidiary became the leader of this new market throughout English-speaking Africa. This success story came to an end in 2019,when van Dijk decided to sell Multichoice and list it on the Johannesburg Stock Exchange. He did so in an attempt to reduce the gap between the real value of Naspers’ assets and its valuation by the financial market.

In the second half of the 1990s, the Cape Town-based group also made investments in Asia and the US in an effort to diversify its African operations. Initiated by Bekker, who was appointed CEO of the group in 1997, several of these ventures turned out to be risky. However, in 2001, the graduate of the University of Columbia made a decision that later turned out to be brilliant, as he acquired a 46% stake in the Chinese start-up Tencent for $32m.

Acknowledging failure

The young Chinese start-up experienced dizzying growth: first by creating instant messaging services (QQ, WeChat), then by becoming a key platform in video games, fintech, etc. In 2021, its turnover reached $86bn and its valuation, around $560bn, placed the Hong Kong-listed company in 11th place on the world stock market. It is this success that is causing Naspers’ management, who were unable to fully leverage it for the benefit of their own shareholders and are now worried that it will be challenged, so much concern.

Too cramped on the Johannesburg Stock Exchange, the group had first tried – in September 2019 – to resolve the problem by housing all its international activities in a holding company called Prosus, which is listed in Amsterdam. It is a more active financial centre than Johannesburg and supposedly more oriented towards technology stocks.

At the beginning of 2021, this plan backfired as Nasper still exerted too much weight on the South African stock exchange (20% of total capitalisation). To rectify the situation, van Dijk validated a system of cross-shareholdings and share swaps, which in August increased Prosus’ stake in Naspers from 5% to 49% and thus enabled a larger part of the group’s value to be transferred to investors in Amsterdam. This is complemented by a 5 billion Prosus share buyback programme scheduled to end in August 2022, again to support the share price.

Nevertheless, six months later, nothing has radically changed. The gap between the Chinese giant’s valuation and that of the South African group’s two holding companies has not reduced significantly. To the contrary, the directors’ increasing number of initiatives gives the impression that management is overwhelmed by the situation.

Naspers seems to have run out of ideas. Still, the company has implemented an aggressive investment strategy to reduce the Chinese giant’s weight on its balance sheet. In five years, the value of its other assets has risen from $13 to $50bn, with investments in the field of classified ads (Avito, Olx), food delivery (Swiggy, iFood), financial services (Remitly, PayU) and shopping sites (Takealot). These are promising assets, but their value is hardly taken into account by investors who are obsessed with the group’s exposure to the Chinese market.

New orientation

To accelerate its transformation, Naspers’ management sold 2% of Tencent’s capital last year. The result was a $14.6bn bonanza, which it has already dipped into to acquire Stack Overflow, the most popular question and answer website for developers, for $1.8bn; to increase its stake (from 24.9% to 27%) in Delivery Hero, a home delivery specialist present in more than 50 countries; and to bring its subsidiary Payu into the world’s top 10 financial services providers on the Internet, thanks to its purchase of BillDesk ($4.7bn).

“At this current rate, the value of our portfolio of investments, not including our share in Tencent, will exceed $100bn in the next few years,” van Dijk said three months ago.

Despite this, the performance of these investments is not universally welcomed.

In the first six months of the 2022 financial year (starting in April 2021), revenues ($4.6bn) generated by its investments in e-commerce companies rose by 52%, compared to the same period a year earlier. Losses also increased from $276m to $372m. This strategy, which has more to do with venture capital than investing in companies with proven business models, still involves too much uncertainty for many observers. At this stage, Naspers’ health remains closely linked to that of the Chinese market.

Nonetheless, it seems that this is a non-issue for van Dijk, whose management style is coming under increasing criticism. “Tencent is an incredible company and it is also an investment with enormous potential,” he told the financiers in charge of analysing his group’s results at the end of November.

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