What To Do With Naspers/Prosus

Naspers and Prosus had a great start to the year. They were up around 25% in less than two months. Unfortunately, they have been heading lower since early April, as investors digest the increased political risk faced by companies operating in China. At the end of last week, they had given up all their gains for the year.

Tech companies in China are under increased scrutiny from officials in Beijing. Tencent and Alibaba are central to the functioning of Chinese society, and have become important institutions. The Communist Party is flexing its muscles, to show everyone who actually holds all the power.

Over the weekend, the Chinese government announced an unexpected change in their education policy. By decree all education companies must now be non-profit organisations. As you can imagine, that is a huge problem for listed companies in the education sector. Authorities said the education system has been "severely hijacked by capital" and "broke the nature of education as welfare".

Owning Tencent shares presents us with two risks. The first is increased regulation in China, which curtails their growth. That would be bad enough, but the company would continue to have a pre-eminent position in the Chinese economy. The much more worrying scenario would be if the current structure whereby foreign shareholders (including ourselves, via Prosus and Naspers) were to be deemed illegal. In that case, Prosus' 30% stake in Tencent, held via a shell company in the Cayman Islands, could be at risk.

This is not the first time that Chinese authorities have upset markets, and usually these concerns fade away once company officials bow and scrape before the bureaucrats in Beijing. We are monitoring the situation closely. We can't know the exact intention of Xi Jinping, but it seems highly unlikely that he will 'go nuclear' on their two most prominent national business champions.