Chance to gain ac­cess to the gam­ing in­dus­try

Financial Mail - Investors Monthly - - Analysis - Petri Redel­inghuys

Naspers has been one of those “love to hate” stocks, es­pe­cially in re­cent times, as the share has pulled back about 21% from the record highs it reached in No­vem­ber last year.

Many of the Naspers perma-bulls seem to be start­ing to lose hope. This ero­sion of con­fi­dence — and of the share price — is of course ex­ac­er­bated by a re­cent drop in earn­ings be­low what the mar­ket was ex­pect­ing for Ten­cent, as well as some reg­u­la­tory head­winds faced by Ten­cent’s gam­ing busi­ness in China.

The in­ter­net gi­ant is Naspers’s big­gest in­vest­ment, through earn­ings rights to just over 30% of it.

Iron­i­cally, the two is­sues men­tioned above are re­lated.

Ten­cent’s earn­ings were lower be­cause reg­u­la­tors put a freeze on the sell­ing of new items and on other in-game or in-app pur­chases.

Gam­ing is a huge in­dus­try, gen­er­at­ing 48% of Ten­cent’s profit, and it is set to ex­pand much fur­ther.

For some per­spec­tive on just how big it is, com­pare it to the third-largest gam­ing com­pany in the world, Ac­tivi­sion Bl­iz­zard (in which Ten­cent has a sig­nif­i­cant stake).

Ac­tivi­sion Bl­iz­zard earns rev­enue of only $7.7bn, com­pared with the $12.7bn that Ten­cent’s gam­ing di­vi­sion gen­er­ated last year.

Each year Ac­tivi­sion Bl­iz­zard hosts Bl­iz­zcon, the world’s big­gest gam­ing and cos­play (cos­tume play) con­ven­tion.

Last year this event was at­tended by 35,000 peo­ple, with an­other 10-mil­lion vir­tu­ally at­tend­ing by tun­ing into var­i­ous live in­ter­net broad­casts and streams.

This year at­ten­dance is ex­pected to in­crease, both

phys­i­cally and on­line.

As the in­dus­try ex­pands, the in­flu­ence it is hav­ing on chil­dren and adults around the world must be un­der­stood, and ul­ti­mately it must be reg­u­lated.

The is­sues of vi­o­lence and moral­ity are of­ten raised when games are dis­cussed, and gam­ing com­pa­nies should be aware of the im­pact their prod­ucts have on so­ci­ety.

But that doesn’t mean it’s game over for the sec­tor. This is an in­dus­try that is com­ing of age. Peo­ple are start­ing to sit up and take note of it.

Chi­nese au­thor­i­ties are con­cerned that chil­dren are be­com­ing ad­dicted to games, ob­sess­ing about them, to the point where it starts to in­flu­ence be­hav­iour, so that, for ex­am­ple, they do not leave the house or eat.

But though there are ad­dic­tive as­pects to gam­ing — and le­git­i­mate con­cerns about that — things are also hap­pen­ing in the space that are hav­ing a pos­i­tive ef­fect on the play­ers as they in­ter­act with each other.

An­other con­cern the Chi­nese gov­ern­ment has raised in the re­cent freeze on new game li­cences was that there has been a surge of cases of near­sight­ed­ness among Chi­nese youth. This prob­a­bly opens the door to a study of the phys­i­cal ef­fect gam­ing can have on the hu­man body.

We can­not ig­nore the short­term im­pact of the bad news on share prices, but we can think op­por­tunis­ti­cally and use that bad news and neg­a­tive sen­ti­ment as an op­por­tu­nity to buy some shares in com­pa­nies that are likely to have very long and pros­per­ous fu­tures.

So here is an op­por­tu­nity to gain ac­cess to the gam­ing in­dus­try through own­ing Naspers.

The com­pany’s man­age­ment has re­it­er­ated sev­eral times that the busi­ness is now too big for the JSE and that it is look­ing to break the group up and list its pieces on sev­eral ex­changes around the world.

I be­lieve that will un­lock value for share­hold­ers.

The “rump”, as it is called, can be left to plod along at its own pace, while the high­growth, high-value in­vest­ments will be able to trade up to fair value with­out the weight of the SA busi­ness hold­ing it down.

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