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THIS WEEK Naspers will release their full-year results. Tencent recently released stronger than expected first quarter results with revenue up by 48 percent and diluted earnings per share up by 60 percent. This was supported by strong growth across mobile gaming, video, subscription revenue and mobile payments.

Tencent

Tencent is dominating. Everywhere. Analysts in general are positive about the prospects of Tencent for the next year or two, especially the gaming revenue. Tencent and NetEase represent 17 of the top 20 mobile games by revenue in China. PUBG (Tencent made the mobile version) has two different games out and while it hasn’t started monetising yet in China, it has taken 2 of the top 3 download spots there.

If global trends are to go by, this has the makings of being a superstar. Tencent has equity stakes in 6 of the top 10 games by revenue in Europe and 4 of the top 10 in North America. By downloads Fortnite and PUBG are in the top 5 games in both Europe and North America. Fortnite (Tencent owns 40 to 48 percent of the producer, Epic Games) has become the world’s biggest game, both on PC and mobile. In the US iOS store alone it has generated $10 million (R356m) in revenue per day for the month of April. It had the highest ever number of hours watched on Twitch in a month, overtaking Tencent’s League of Legends.

Epic have announced a prize pool that has made global gamers excited and is likely to keep interaction very high for years to come. Prizes for tournaments in the 2018/2019 season total $100m. The general expectation of better monetisation of Tencent video and payments would more than offset softer gaming revenue going forward. PC game could suffer from a secular shift to mobile, although this is partially offset by a promising pipeline, higher eSports engagement and market consolidation.

Higher subscription revenue from Tencent Video and robust revenue growth in the “others” segment will be driven by monetisation from commercial payment business.

Prospects

Many investors look at the price/earnings ratio of Naspers and get frightened with the current 96 number. Another way of looking at Naspers is as an investment trust, which means the sum of all the underlying parts should be calculated and the share price is a function of this. Usually, an investment trust will trade around 10 to 15 percent below its net asset value. In the case of Naspers, the discount is more than 40 percent.

The reason is mostly that investors are scared of Tencent, which has a very high price/earnings ratio, and that the price might fall. Be it as it may, most analysts value Naspers much higher at target prices of around R5 000 and overweight recommendations.

Pay TV cash flows and fundamentals in the eCommerce businesses are strong. If the discount were to persist at these levels, it could be a catalyst for Naspers to move from improving fundamentals to taking more technical actions. During March, Naspers announced its disposal of 189.9 million Tencent shares and the funds to be invested to strengthen its balance sheet and its classifieds, online food delivery and fintech businesses.

Naspers also disposed of its 11.18 percent stake in Flipkart for a total consideration of $2.2bn. The group’s cumulative investment in Flipkart amounted to $616m. Management provided the following guidance:

The focus for the media and entertainment business is to manage sectorial and macro-economic headwinds through cost containment

Focus on driving cash generation and profitability of the e-commerce businesses.

They will look for opportunities invest in the next wave of growth.

Focus on innovation and transformation. to improve the competitiveness of the business. to