Buy a stake in the Chi­nese in­ter­net gi­ant be­hind Fort­nite at a 36pc dis­count

It may sound like the stuff of fan­tasy but a stake in Ten­cent can be ac­quired at a huge dis­count if you buy it via an­other listed com­pany

The Daily Telegraph - Business - - Business - RICHARD EVANS

A £55BN val­u­a­tion anom­aly re­ally should not ex­ist in the mod­ern fi­nan­cial mar­kets. But ex­ist it does – and bet­ter still Questor read­ers can use it to buy a stake in one of the world’s most im­pres­sive in­ter­net com­pa­nies at a 36pc dis­count. That com­pany is Ten­cent, which is based in China and listed in Hong Kong and is most fa­mous for WeChat, its mes­sag­ing, en­ter­tain­ment and pay­ments app, and its

Fort­nite game. WeChat is a lit­tle like What­sApp but does far more; it has be­come ubiq­ui­tous in China, where it has more than a bil­lion users, as a re­sult. “WeChat is a fan­tas­tic play on Chi­nese con­sumer be­hav­iour. It is the gate­way into so much spend­ing ac­tiv­ity, such as pay­ments, en­ter­tain­ment and gam­ing,” said Joe Bauern­fre­und of As­set Value In­vestors, which owns – in­di­rectly, as we will ex­plain – a stake in the com­pany.

“Al­though Ten­cent is a play on the Chi­nese con­sumer, it also has a great port­fo­lio of busi­nesses around the world. It’s best to see it as a con­glom­er­ate. Along­side Alibaba, it is one of China’s two pre-emi­nent in­ter­net com­pa­nies.”

Mr Bauern­fre­und owns Ten­cent in­di­rectly in or­der to ben­e­fit from the huge dis­count we men­tioned in the in­tro­duc­tion. To ex­plain how it has arisen we need to leave China and Hong Kong for a mo­ment and travel to Hol­land – via South Africa.

A very sub­stan­tial stake in Ten­cent was un­til last year held by a South African com­pany called Naspers, it­self a hugely suc­cess­ful in­vestor in tech­nol­ogy busi­nesses. Naspers had in ef­fect out­grown the rel­a­tively small Jo­han­nes­burg stock mar­ket on which it is listed so last year it made it­self smaller by list­ing a sep­a­rate com­pany, Pro­sus, on the Euronext ex­change in Am­s­ter­dam.

Into Pro­sus it off­loaded its in­ter­na­tional hold­ings, among them Ten­cent. But Ten­cent is so valu­able – its mar­ket value is about £500bn – that Pro­sus’s 31pc stake in it dom­i­nates the Dutch-listed com­pany. In fact Ten­cent ac­counts for about 85pc of Pro­sus.

As a crude ap­prox­i­ma­tion we could say that a Pro­sus share is more or less a Ten­cent share. With one dif­fer­ence: it will cost you about 36pc less. The mar­ket value of Pro­sus is about £116bn, which val­ues its 31pc stake in Ten­cent at about £99bn. But in Hong Kong you would have to pay £154bn for a 31pc stake in the firm if you bought its shares di­rectly – a dif­fer­ence of £55bn.

How on earth can such a sit­u­a­tion arise, you may be won­der­ing. It’s un­der­stand­able for a val­u­a­tion anom­aly to ex­ist in some tiny busi­ness that no an­a­lyst or fund man­ager ever looks at, but Ten­cent is one of the largest and most high-pro­file com­pa­nies on the planet.

“A lot of peo­ple don’t know that Pro­sus ex­ists,” Mr Bauern­fre­und said. “Mar­kets tend to miss this kind of thing. It’s just the way in­vestors are think­ing at the mo­ment – all their fo­cus is on the China-Amer­ica trade war and on pas­sive in­vest­ing.”

He ac­knowl­edged that Pro­sus was “not the most ef­fi­cient way to own Ten­cent as it has other hold­ings and Pro­sus is a kind of fric­tion be­tween the in­vestor and Ten­cent”. But he said that even if Pro­sus’s other as­sets were val­ued at zero, you would still be buy­ing Ten­cent at a dis­count of about 20pc.

With­out wish­ing to strain read­ers’ credulity fur­ther still, it’s pos­si­ble to get ex­po­sure to Ten­cent at an even big­ger dis­count – 54pc, said Mr Bauern­fre­und – by buy­ing shares in Naspers. This is be­cause it too trades at a dis­count to the value of its as­sets, which in­clude a 72.5pc share of Pro­sus. This would of course be a less clear-cut way to own the Chi­nese firm.

The fi­nal el­e­ment of this bizarre tale is that there is even an im­me­di­ate cat­a­lyst for Pro­sus’s dis­count to nar­row. On Mon­day its in­clu­sion in the Euro Stoxx 50 in­dex took ef­fect. This means that tracker funds will have to buy its shares, which Mr Bauern­fre­und said should af­fect its share price “within a day or two”.

Ten­cent should be rel­a­tively un­af­fected even if the trade war be­tween China and Amer­ica es­ca­lates. “The vast ma­jor­ity of Ten­cent’s busi­ness is China-cen­tric so any­thing pres­i­dent Trump did, such as ban­ning WeChat in the US, wouldn’t make much dif­fer­ence,” Mr Bauern­fre­und said.

Questor says: Buy

Ticker: PRX: NA

Share price at close: €77.50

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