What In The Dip?

It's not often that you see a R700 billion company shed 13% of its value in one day. Naspers is now down 38% since the start of the year. As Byron noted a few weeks ago, the drop in Naspers is due to a number of reasons, including having business interests in Russia and a downward re-rating of the whole tech sector.

Yesterday's drop was caused by the Tencent share price getting clobbered in Hong Kong. There are rumours that Tencent is about to be fined by Chinese regulators over allegations that they didn't regulate their WeChat Pay service well enough, resulting in illicit fund transfers on the payment network. Investors are concerned that the Chinese government might be shifting to an even more hostile stance towards Tencent and Alibaba.

Sadly, the Naspers share price is dropping faster than Tencent's, increasing the discount to underlying assets to around 60% now. The growing NAV discount puts increased pressure on Naspers management to find a solution to unlock value for shareholders. So far, they have spent over EUR 100 million on advisors and created the very complicated Naspers/Prosus circular shareholding structure, which has only made the discount worse.

Naspers shareholders are understandably upset, and face a dilemma. Our view is that Tencent is a global champion, so the autocrats in Beijing won't want to clip their wings too much. If Naspers management announced a separation of Tencent from their other assets, the Naspers share price would jump at least 40% overnight.

We think a Tencent spin-off will happen at some point but it might take years for management to finally give-in to market pressure. What will happen to Tencent between now and then? Our view is that company relations with Beijing will normalise, and Tencent will continue growing, but the uncertainty risk has increased recently.