Has Tencent lost its X-factor?
The sale of 96-million shares by Prosus had investors in the Chinese tech giant all riled up. It’s a telling sign, say some
● Has Tencent gone ex-excitement? That’s not quite the same as ex-growth but is probably synonymous with ex-exciting growth. After 20 years of eye-popping expansion, it’s becoming difficult to avoid the feeling that Tencent is going to be a tech plodder for the rest of its life.
Ten, even five years ago, it’s unlikely that evidence of Prosus selling part of its Tencent holding would have triggered the sort of price slump seen earlier this month. Investors are clearly skittish.
Tencent’s results for the quarter to endDecember saw a 15% increase in online advertising revenue thanks to its recently promoted TikToklike short video product. But its cloud and fintech businesses, which carry the group’s hopes for strong long-term growth, turned in a disappointing 1% decline in revenue. This was attributed to
Beijing’s overnight switch from a strict
Covid lockdown to no lockdown.
Looking back over some unsettling periods, it seems Tencent went ex-excitement in April 2018 when the Chinese government refused to grant it a licence to commercialise its latest video game.
Until then the giant social media group had a charmed existence. Nothing ever went wrong and it was able to grow to its heart’s content, using its huge cash resources to vacuum up new entrants and potential competitors, expanding its reach and its markets wherever it chose.
The licensing difficulties marked the end of a long honeymoon period for Tencent and other Chinese tech giants.
Things looked set to get worse when, less than a year later, it became evident that not only were Chinese regulators less supportive of their national champions but US politicians were also keen to put roadblocks in the way of their dreams of international domination.
Surprisingly, the increasingly hostile approach of the US government did not persuade Beijing to be more supportive of its world-leading tech companies. And in late 2020, ill-considered comments by Alibaba founder Jack Ma triggered an all-out declaration of war.
For Tencent, whose CEO, Pony Ma, had cultivated close ties with the Chinese Communist Party, the tougher regime wasn’t just about increased scrutiny of its gaming business. The group’s WeChat payments system also received more attention, as did its acquisition policy and app development.
Set against this background, it was hardly surprising that word of a pending sale by Prosus of another block of shares resulted in a 5.2% slump in the Tencent share price on April 11. A twitchy market evidently assumed Prosus had accelerated its sell-down programme, which could only be bad news for the share price.
But it turns out Prosus has made no such change. Jean Pierre Verster, CEO of Protea Capital Management, says the market was responding to news that Prosus had moved a block of 96-million Tencent shares into the Hong Kong clearing system in preparation for a sale, in line with its current programme. “The extent of the reaction was an indication of how weak trading sentiment was that day, as well as a general malaise in the market,” Verster tells the FM.
Prosus spokesperson Shamiela Letsoalo confirms there were no changes. “There is no new sell-down programme or acceleration of the current programme,” she says, adding that moving the shares onto the clearing system was part of the necessary dematerialisation process, which involves replacing paper shares (held by Prosus) with electronic records of ownership.
“It is a necessary administrative move to facilitate the ongoing open-ended share repurchase programme.”
The 96-million shares represent about 1% of Tencent, and at current prices are worth about $4.4bn. At the end of January, Prosus had reduced its Tencent holding to 26.9% from 29% at end-June 2022.
The proceeds are being used to fund share repurchases by Prosus and its holding company, Naspers, in a bid to shrink the enormous gap between Naspers/Prosus and its investment in Tencent. The frustrating news for Naspers/Prosus shareholders is that there’s been little progress on this front over the past year.
Apr
In mid-April, according to Prosus calculations, its NAV per share was R2,155.20. In mid-April, the Prosus share price was R1,352.60, which reflects a 40% discount, little different from the gap before the multibillion-dollar programme.
Sasfin’s David Shapiro is one of a few market commentators frustrated by Prosus’s determination to pursue a strategy that has been so ineffective. “They’ve spent an enormous amount of money trying to reduce the gap but it’s still huge,” he tells the FM. Shapiro would prefer Prosus to sell its other businesses and leave Tencent untouched.
“Even if you’re concerned about China’s prospects, Tencent is likely to generate more profit over the long term than the other businesses,” says Shapiro, who concedes some of the other businesses may be doing well at the sales line but are making little or no contribution to operating profit.
Verster says while the Prosus and Naspers share prices have outperformed Tencent in the past 12 months, Tencent remains their primary driver. A secondary driver is the financial engineering under CEO Bob van Dijk, such as the sale of Tencent and repurchase of Naspers/ Prosus. A distant tertiary is the performance of the non-Tencent businesses.
But Verster says he’s picked up a new dimension to the secondary driver. Naspers is selling Prosus shares with the sort of complicated endgame we’ve come to expect, namely that Prosus emerges as Naspers’s holding company. That would be a win for shareholders, though perhaps not so much for Edward Kieswetter.