Tencent 2Q numbers - growth accelerating

Tencent are very important to Naspers. Possibly more important to the share price than all the other parts put together. The South African company owns over one-third of a percent in the Chinese "internet" company. In the last annual report that is available to investors to read, MIH, a subsidiary of Naspers, owned 3,151,201,900 shares or 33.51 percent of Tencent. Ma Huateng or Pony Ma as he is better known, owns 855,446,400 shares, or 9.1 percent of the company through an entity called Advance Data Services Limited.

Tencent are really an entertainment and media company, providing online gaming through mobile and desktop, as well as messaging and retail experiences through the various platforms that they operate. The segregation for the purposes of reporting is Value Added Services (VAS), Online Advertising and "Others", which includes online retail. QQ, online gaming, partnering with content providers (including the NBA, HBO, Paramount, Warner and Sony Music, as well as making sure that they develop their own content). The one platform you will know the best of the lot will be WeChat, which has also introduced WeChat pay (and Weixin Pay with Weixin, the international version of WeChat). Except, in all likelihood, you are using WhatsApp.

You and I may not engage in playing Leagues of Legends, the most played online game in the world (account for a little less than one in four hours of games played), there are even people who watch online how other people play the game. True story. According to Gamoloco, the most hours of games watched last month via Twitch (owned by Amazon.com) is 77 million hours of League of Legends, 52.5 million hours of Counter-Strike was watched last month. Dota 2 was third at 32.3 million hours and HearthStone was fourth with 31.4 million hours. Counter-Strike has been gaining sharply on League of Legends.

The most watched sports game is in 14th place, NBA 2K16, with 5.265 million hours watched. There are 30 teams in the NBA. I selected the Chicago Bulls, there are 82 normal matches in a season for that team. A match is 48 minutes, the real time taken, including breaks etc. is around 2 to 2 and a half hours. That is roughly 205 hours of basketball by just the Chicago Bulls. If one multiplies the season by the number of teams, you get 6150 hours of watchable basketball. Now, obviously the 5.265 million hours are being watched by many people online, whilst they are doing "other things", the point I want to make is that you can watch ten matches a day online if you wanted, you would NOT know the result, seeing as you are also watching that live. Online gaming watching, there is a very different kind of entertainment, try and explain that to the oldest person in your family.

The numbers of users are staggering. What I find pretty impressive is that we have known that the Chinese have been on an extraordinary spending and building exercise that humanity has never seen before, much of that has slowed in recent years. So this business is in a phase of operating in a market where consumers are the next engine growth for the economy. Now the second biggest economy in the world, with the biggest population, China is certainly stepping forward as a world power.

Revenues for the 2nd quarter (See the release Tencent announces 2016 second quarter and interim results) were 35.691 billion Renminbi, or 5.382 billion US Dollars. Annual revenues in 2011 clocked a total of 28.496 billion Renminbi. The last quarter revenues were significantly higher than a whole year five years ago. For the half year, revenues were 67.686 billion Renminbi, or 10.207 billion Dollars. Revenues for the entire year of 2014 were 78.932 billion Renminbi. A half of 2016 compared to an entire year of 2014.

So I am guessing that you wouldn't be surprised to learn that quarterly revenues, relative to the last reported corresponding quarter in 2015, grew 52 percent, the first half revenues grew 48 percent when compared to the corresponding half. First half profits increased 43 percent year-on-year to 27.272 billion Renminbi, or 4.181 billion Dollars. Basic earnings for the first half registered 2.28 Renminbi. The price of course is listed in Hong Kong, in Hong Kong Dollars, even though the business is headquartered in Shenzhen. And believe it or not, incorporated in the Cayman Islands. And the Hong Kong Dollar is pegged to the US Dollar at 7.80 Hong Kong Dollars to the US Dollar. Which explains why, as the Dollar has weakened, there hasn't been a noticeable increase in the Naspers share price, the stake in Tencent is less valuable in Rands.

So, for the purposes of our investments in Naspers (we don't own any Tencent directly), let us turn to our trusty "what is their stake worth" relative to what the market values the entire business. Of course, it is a simplistic way of looking at it, a measurement relative to the entire Naspers market cap. So, Naspers through their subsidiary own 3,151,201,900 shares of Tencent, we are presuming that Naspers haven't sold any shares. Tencent's share price is trading at 203.4 Hong Kong Dollars. The total amount that Naspers owns is 640.9 billion HKD. At the exchange rate of 1.71 Rand to Hong Kong Dollars (thanks Google), the stake in Tencent that Naspers owns falls just shy of 1.1 trillion Rand. The market cap of Naspers as of last evening was 935 billion Rand. Just saying. So whilst Tencent never looks cheap, trading on a 33 multiple forward, it certainly looks a whole lot cheaper to own Naspers. This is pleasing to see, Naspers will still have a whole lot of reliance on the performance of that business, whilst they continue to roll out other businesses.