Tencent Q3 Numbers

Tencent reported numbers yesterday. So what, why should we care? Well, last I checked, the Naspers ownership of Tencent was 33.85 percent. Which is a lot, to own of any company. Under the guidance of Koos Bekker, the company got involved in the early stages of Tencent's development. Naspers actually turned 100 years old this year, it is a far cry from the company that it once was, with the legacy print businesses a thing of the past. They really are, what the attraction is? I can't seem to see it, when last did you see anyone under the age of 25 reading anything other than on their mobile phone? Yip, me neither, and those are the consumers of tomorrow.

Quick Tencent calc, as to see how much the value is worth to Naspers. Tencent market cap is currently 1.46 trillion Hong Kong Dollars, Naspers share is 33.85, multiply the two by one another and you get to roughly 494 billion Hong Kong Dollars. The inter-webs, or more specifically, Google, tells me that one Hong Kong Dollar is equal to 1.84 Rand this morning. Multiply the Hong Kong Dollar market cap by the exchange rate (back to Rand) and you get a smidgen over 907 billion Rand. Ummmm. . . why is the Naspers market cap this morning, on opening just under 880 billion Rand? This implies that the local market gives Naspers a discount relative to the rest of their holdings and the rest of their assets, which includes a growing satellite TV business that is still growing strongly. Perhaps the best and cheapest way to own Tencent is through Naspers.

Let us quickly look at the Tencent results, for their third quarter. As we often point out, they may report in Renminbi, the stock however trades in Hong Kong Dollars, not too dissimilar to Richemont I guess, which reports in Euros, yet the stock trades in Swiss Francs. Group revenues increased 24 percent, to 4.18 billion Dollars (26.5 billion RMB), profits for the period were 1.192 billion Dollars. A quarter, that is right! This machine that is Tencent, makes in profits more than 1 billion Dollars a quarter, and grew profits by 34 percent. Basic earnings were 0.8 RMB, which converts to 0.97 Hong Kong Dollars.

So what multiple do you pay for a company that is growing profits by 30 odd percent? Let us get to that in a second, first things first, how did the business do? Online revenues doubled in a single year. Astonishing. There are now 200 million credit cards linked to their mobile payment systems via the QQ Wallet and Weixin Pay services. Online gaming revenues increased 27 percent, mostly as a result of strong mobile gaming. That is right, you wondered if people were reading the news on their smartphones, wrong, they were engaged and engrossed in Candy Crush, or Angry Birds (I am a little out of date here, bear with me). Astonishing number of users, I guess China is that big. Monthly Active User accounts (is that different from individual users?) clocked 860 million, I guess that reaches a ceiling at some stage. Of those, 639 million connected through their mobile phones. Do you see the similarities here with Facebook?

OK, let us answer that question, what are they likely to earn for the full year this year, and what are they likely to earn next year? Consensus for this year is around 4.2 Hong Kong Dollars, and next year it is 5.6 Dong Kong Dollars, looking towards 2017 the far out there analysts have penciled around 7.3 Hong Kong Dollars in earnings. So currently the stock at 153 Hong Kong Dollars (up two percent plus this morning) trades on a multiple of 36.4 times Current Year estimates, 27.3 times next years earnings and checking the clock two years out at 20.9 times. Almost anything could happen between now and then of course, I just wanted to show the growth rates that the analysts have penciled in sees a quick "PE unwind".

If you apply a PEG ratio (Price to earnings over growth rates), then the stock trades on 1.09 times PEG next year, and 0.9 times 2017. And by that metric the stock is still cheap, the high PE (not so high any more) justified as a result of the growth rates. We maintain our buy on Tencent, the only way being through Naspers locally. Given the discount applied by us geniuses here (we are obviously smarter than Hong Kong investors), it provides an opportunity to accumulate the stock. Our house view is that Naspers still has plenty of scope to reward shareholders in the coming years.