Tencent 3Q numbers - Strong top & bottom line growth

Tencent released numbers yesterday, you will recall that we teed you up with the WSJ article that included analyst expectations. It is one of my least favorite things (forecasting to the decimal point), humans however like an element of control in "all things" and tend to have all sorts of weird phobias associated with the things that we can't control. Spiders to flying, to the dark and so on, we all have different ways of avoiding or dealing with our fears. Anyhows, Naspers, at the turn of the last millennium invested in a small Chinese internet company called Tencent, the rest as they say is history. I wonder if it really was one of the best deals of all time, it may well be.

Let us shift gears and look at these numbers quickly, we can do a deep dive when the company reports full year numbers in three months. These are for the 3Q to end 30 September, and are available for download here - Tencent announces 2016 third quarter results. For our purposes we almost always have to convert to Dollars and then back to Rand. The company is primarily a Chinese mainland business and they report revenues and profits in Renminbi (Chinese Yuan), whilst their listed price is in Hong Kong, quoted in Hong Kong Dollars obviously.

Revenues grew 52% year-on-year (6.048 billion Dollars for the quarter, this is a real big business), operating profits increased 40% year-on-year when compared to the prior third quarter (2015). Profits increased by 42% year-on-year to 1.614 billion Dollars, there was slippage with operating margins from 39 to 36%. Basic EPS clocked 1.251 Renminbi. And this is where you have to start working backwards to get the valuations and then also, most importantly for us, to see what it means for our Naspers shares. Covert Renminbi to Hong Kong Dollars at a rate of 1.14, you get to 1.43 HKD of earnings. The share price, for the record, trades at 194.1 HKD. The stock trades on a rolling twelve month multiple in the mid thirties. Growing at these rates, that is a more than acceptable valuation.

We will do a more detailed analysis later on, for now, let us see the value of what Naspers holds. As of the last annual report, MIH, a subsidiary of Naspers, owns 3,151,201,900 shares or 33.51 % of Tencent. At the prevailing share price (above) that equates to 611.65 billion Hong Kong Dollars. At the current HKD/ZAR exchange rate (1.84) that equals 1.126 trillion Rand. What? Naspers closed up nearly three % yesterday, the market capitalization is equal to 933 billion Rand as of last evening.

Before you scratch you head wondering if this simple math is completely flawed, remember that Naspers has multiple other businesses, some of which they have been selling and freeing up significant pots of money (still pending), other businesses that they are funding aggressively that still require pots of cash in order to "succeed". All their ecommerce platforms. Not all are equal of course, there is recent talk that Naspers may sell some of their Middle East business, Souq.com to Amazon.com. Jeff Bezos, according to sources, was in Dubai last week. When I say Naspers' business, there are other equity holders (including Tiger Global) and a dilution (i.e. an investment by Amazon along side Naspers) may be what happens here. Nice to partner with that crowd, right?

In short, do nothing with your Naspers shares, hold them on the basis that the entertainment business in China is flourishing. That is what Tencent through their platforms are. Many may snigger at the types of entertainment that younger people take part in, perhaps when radio first became a household entertainment theme, people bemoaned the fact that they didn't see each other any more and that the art of story telling would die. YouTube, online gaming, all sorts of different communication methods are just that. In fact, in a world with Facebook and Instagram and WhatsApp, I think that I communicate more now with the people around me that at any other point. That includes family and colleagues. There is more that is sharable now than at any other point in history. The quality is what matters.

In closing, the various EPS outlooks (there go those forecasts again) that I have seen peg Tencent earning 7.5 Hong Kong Dollars next year. That means that the stock trades forward on around 26-27 times earnings. So much for being wildly expensive, right? We continue to accumulate Naspers, with the share price having been pretty static over the last 12 months. This lull represents a big opportunity at many levels.