TenCent and Naspers

It's tough out there for these technology stocks that have done so well in the last few years. It seems that reporting results that are in line with consensus is not actually in line with consensus as consensus is actually an expectation to beat consensus. Get it? Sounds unfair not so? Tencent reported fourth quarter results for 2010 which were in line with consensus and the stock has dropped around 10% in Hong Kong today.



The Score Sheet. Revenue was up 50% year on year slowing down from 55% in the third quarter whilst net income (in other words profit) was up 46%. Management was cautious in their consensus however, stating that margins would be under pressure in 2011.



Remember that Naspers own 35% of this company who have a current market cap of $51bn. That equates to $17.85bn, 81.5% of Naspers market cap, now sitting at $21.9bn at current currency conversions. Amazing. You see how Naspers is potentially being undervalued. And you see why the Naspers share price follows the Tencent price so religiously. Our market is up 0.5% so far today and Naspers is down 3%.



The Tencent stock closed at 216.8 Yuan and made 4.43 Yuan for the year, trading on an extremely demanding multiple of 49. Earnings are expected to be around 6 Yuan next year however so a forward multiple of 36 is afforded. The dividend was increased from HK$0.4 to HK$0.55. This will increase Naspers' cash flow substantially. Around HK$353 million will be paid to Naspers in fact. That equates to R318 million. It's a small dividend cover but the company is growing extremely fast as you can see.



Investment case against Tencent. Like i said. The stock trades at an extremely demanding multiple. That is why the Naspers stock does not reflect the full value of their Tencent asset. I don't think investors here fully understand the business and the potential it has.



Or they don't believe Tencent can grow its earnings enough to justify its share price. The company also expects revenue growth to slow down this year. Who can blame them though? Revenue grew 76% in 2009. But I guess the share price has very high expectations. Management talk of margins slowing down will also ward off investors. Let me just remind you that margins now sit at 67.8%.




Investment case for Tencent. It's hard for me not to be bias towards this stock. I love the sector. Look at those margins. Their business model is fantastic. They make virtual stuff and sell it for real money. Online gaming is addictive and is becoming a huge part of society. If you are not involved you are just not with the programme and hence the multiplier affect takes its toll.



That is why they have more subscribers than Facebook with over 650 million. How are they going to grow these earnings? They plan to make some significant investments in their online games, messaging services and social networking. They have to remain on top of their game. The industry is evolving and growing so quickly and you cannot be left behind. They have a big enough subscriber base so they need to improve their services so as to suck in the cash. They've done it before so I back them to carry on.



Conclusion. Buy Naspers. You are getting this fantastic company at a discount. Naspers is down today so what better time to get involved if you haven't already.