Dangers loom in Naspers tale
NASPERS’S DISPROPORTIONATE SIZE MEANS IT NOW CONSTITUTES 20% OF THE ENTIRE EXCHANGE
Does the JSE, and by implication the investing public, have a Naspers problem? If you are looking for problems, this is the kind of problem to have. Naspers has been the star performer of the exchange over the past five years and longer.
The game changer was the company’s $34m investment in Tencent in 2001. That stake, now pegged at 31%, is worth $160bn today. The cumulative returns have ballooned Naspers into the stratosphere, so much so that the company has on its own played a major role in supporting the overall value of the exchange through a rough economic period in SA, protecting the pensions of millions in the process.
At this point it’s hard to find a critic since so many have benefited from the company’s wondrous rise. That was underlined again this week when the company cashed out of Indian e-tailer Flipkart for $2.2bn, which was sold to US giant retailer Walmart. Again, the returns were spectacular; Naspers invested $616m in total into Flipkart, starting about six years ago.
But some dangers loom. The first problem is that the discount between Naspers’s market capitalisation and the value of its stake in Tencent has been widening, and now looks dangerously large. The discount is about 40%, which means Naspers should be worth a gob-smacking R2.2-trillion rather than the R1.6-trillion at which it is valued on the JSE.
There are many ways of looking at this problem. Either the largely South African investors are valuing Naspers correctly, in which case Chinese investors have got massively ahead of themselves. Or South African investors are failing to see the value in the company. In either case, the discount does imply that the market is valuing everything else the company owns — and it owns a lot — as a detraction rather than an addition. Given the Flipkart transaction, that seems obviously wrong.
But there is another alternative. It’s possible that the South African market is just not big enough. The size of the discount ought to be attracting foreign investors but, obviously, they have the option of just buying Tencent directly. For local investors, the problem is that they are most probably already invested to the hilt in the share. Naspers’s disproportionate size means it now constitutes 20% of the entire exchange. For South African investors, as much as they might like the company, that’s probably the limit of their prudent exposure to a single stock; beyond it in fact.
This is especially so if you consider that in terms of conventional price metrics, like a price:earnings ratios, Naspers is massively overvalued. Clearly, conventional price metrics are being temporarily put on hold because they cannot reflect exponential future value increases. But even by the metrics of super-growth stocks like Amazon, Apple and Google, the growth of Tencent and consequently of Naspers looks hazardously extreme. For example, Amazon’s cumulative returns over the past decade amount to about 250%; Tencent’s returns are just less than double that.
The problem is what happens if the price of the stock comes down very fast. In some ways, the Finnish exchange had this problem with the sudden success and then equally sudden failure of mobile phone company Nokia. In this context, the discount with Tencent actually works in favour of Naspers shareholders, since it creates a kind of buffer. Tencent would have to fall 40% before, technically speaking, Naspers would be affected.
If only markets worked that way. The JSE’s role here is circumscribed; it’s for investors to determine value, not the exchange. But there is a belief it might try to engineer an orderly dismount if things got bad. One way would be to encourage the company to unbundle its stake in Tencent to shareholders. Another possibility is to split the listing into a local holding of Tencent and, separately, the remaining assets. The JSE might not like it, but it might be worth Naspers taking a secondary listing in Hong Kong or Singapore to spread its shareholder base. These are tricky issues, but the time to fix the roof is not when it’s raining.