Drilling down into winning bet Naspers has on Tencent

NASPERS’s share price continues to rocket to record highs, thanks to its 34% investment in the Chinese social media company Tencent. This means Naspers’s stock is trading on a price-to-earnings ratio of 109 — six times more than the JSE’s wider ratio of 17 times earnings.

But now analysts are questioning whether Tencent is too cheap compared with its most successful global peer, Facebook — which suggests there may be even more upside in Naspers’s share price.

Already, Tencent’s stock is trading at a steep discount to Facebook — a gap that is becoming harder to justify. The Chinese social media giant brought in roughly the same amount of revenue as Mark Zuckerberg’s US counterpart last year, and Tencent was also more profitable.

Yet, Tencent’s stock trades at a price-to-earnings ratio of 63, which is considerably less than Facebook’s ratio of 74 — a value gap that warrants a rethink.

In China, where Facebook, Twitter and YouTube are banned, Tencent dominates social media networks.

The Hong Kong-listed company boasts more than 1.4 billion active monthly users on its Facebook-like QQ and QZone platforms.

Its popular chat app WeChat, which combines messaging, games and payments, now has 500 million users each month. Although many users probably have multiple accounts, they generated $12.7-billion (about R150.7-billion) in revenue for Tencent last year, slightly more than Facebook’s $12.5-billion.

And that is where the similarities between the two end.

While advertising accounted for 92% of Facebook’s revenue, gaming is Tencent’s primary source of income. Games such as League of Legends and Candy Crush Saga generated 57% of Tencent’s revenue. Membership fees from QQ and QZone brought in an additional $3-billion.

The Chinese group’s 30% net margin is also healthier than Facebook’s 23%. As a result, Tencent’s earnings last year were a third higher than at Zuckerberg’s company.

And yet, investors place a lower value on the Chinese group’s earnings.

Perhaps the concerns about future growth may explain this, as Tencent may find it hard to expand far beyond China’s borders. By contrast, just 15% of Facebook’s monthly active users are in North America, which is why Facebook’s earnings could be expected to grow faster in the future.

Even so, the difference may be harder to justify as the two business models converge.

Tech firm may find it hard to expand beyond China’s borders

Facebook announced on March 25 that it would open up its Messenger app to become a platform for other services — similar to WeChat.

Meanwhile, Tencent is experimenting with advertising on its chat app, a move that Barclays estimates could generate more than $3-billion in revenue for the company by 2017. Tencent shares have risen by more than 30% this year, while Facebook’s are up less than 5%. Expect the gap to narrow further. —