It's been a quirk that the largest shareholder in the Chinese tech giant Tencent Holdings (TCTZF) and HK:0700 is a South African company that began life printing an Afrikaans-language newspaper back in 1915. But that may not be the case for much longer.
Cape Town-based Naspers (NAPRF) and JBG:NPN owns 28.8% of Tencent via its Dutch holding-company subsidiary Prosus (PROSF) and AMS:PRX. Naspers has built out from its publishing roots to become one of the world's largest tech-investment venture-capital funds.
The two companies said on Monday that they are launching a long-term plan to buy back their own shares. They'll fund the scheme by selling shares in Tencent. The stocks of Tencent, Naspers and Prosus have all been on the move this week as a result.
The promise of a hefty chunk of Tencent's market cap suddenly coming up for sale has sent the Shenzhen-based company's shares south. But long-term buyers could find this an attractive buy-in point for Tencent, the world's largest mobile-gaming publisher. It also runs the superapp WeChat, which is omnipresent in China, an instant messenger that has morphed into a payment service for, well, just about anything you can imagine.
After opening higher, Tencent shares fell 8.8% in Hong Kong trade between mid-morning Monday and Wednesday's Asian close. Since peaking at an all-time high in February 2021, Tencent shares have fallen 51.8%, thanks in large part to Beijing's crackdown on Big Tech.
Prosus and Naspers say buying their own shares, which trade at a significant discount to their Net Asset Value, will "efficiently unlock immediate value for the shareholders" of both companies.
And both Naspers and Prosus have seen a significant bounce. Naspers shares have gained 20.3% so far this week on the Johannesburg Stock Exchange, through Wednesday morning, while Prosus is up 14.9% in Amsterdam. Either holding is a way to buy into a large portfolio of emerging-market early-stage tech plays.
The two companies are aware that announcing their plans is actually to their detriment if they drive the value of Tencent shares down, and thereby ensure their own shares sell for a lower price.
Prosus has stressed that it will soon begin selling only "small numbers" of Tencent shares at regular intervals, and "in an orderly manner." It has hired a third party to transact the sales at arm's length.
The companies calculate that funding the plan over the last three months would have seen them sell the equivalent of 3% to 5% of Tencent's average daily trading volume. That, they hope, will minimize the disruption in the price of Tencent.
Naspers may also sell Prosus shares so that it can buy more of its own stock.
Naspers and Prosus have also been selling shares in the Chinese e-commerce site JD.com (JD) and HK:9618, which they received as dividend payments out of Tencent. That has raised US$3.7 billion. The companies are keeping that cash on hand for "general corporate and liquidity purposes," however, rather than plowing it straight into share buybacks.
Naspers started life as Die Nasionale Pres, or The National Press, in the South African winery town of Stellenbosch, printing what's now called Die Burger newspaper, which staunchly supported apartheid during that era. The company branched out into Afrikaans-language magazines and book publishing.
But what was a rather staid text-publishing company morphed into a telecom-and-tech investor. It set up South Africa's first pay-TV service, Mnet, in 1985, around the time that the apartheid system started to fall apart. It then started an Internet service provider in South Africa, Mweb, in 1997.
It was in 2001 that it made the fateful decision to invest US$32 million to take a 46.5% stake in Tencent. The move proved to be one of the best investments in history.
Tencent was only three years old at the time, and best-known for its QQ instant-messaging platform. Naspers has gradually sold down some of its stake, but the current holding, at close to one-third of Tencent's market cap, is still worth US$129 billion.
One problem of Tencent's great success over the holding period that Naspers and Prosus have held the stock is that, as Tencent stock rose, the massive chunk of Tencent shares began to dwarf the other lines of business for the two companies.
It's a story similar to the early investment by SoftBank Group (SFTBF) and T:9984 into Alibaba Group Holding (BABA) and HK:9988, Tencent's bitter rival. SoftBank placed a US$20 million bet on Alibaba back in 2000, in its early days. The 26% holding has now grown to be worth around US$100 billion.
Naspers has struggled to sustain its own identity in the shadow of its huge Tencent holding. It spun out Prosus in 2019 as a holding entity for much of its tech investments, including the Tencent stake. The Tencent holding alone is equivalent to roughly one-tenth of the Johannesburg Stock Exchange's entire US$1.2 trillion market capitalization.
Prosus trades at a 50% discount to its Net Asset Value. In fact, the market values its holdings in other companies effectively at zero. Its own market cap, at US$133.6 billion, is basically equivalent to the value of the Tencent stake alone. Naspers trades at a discount to NAV of around 65%.
Naspers owns 57% of Prosus, leaving it with voting control. Prosus in turn owns 49% of Naspers, meaning Prosus effectively has the economic interest of around 60% of the group's international assets.
Naspers and Prosus have been early investors into companies such as Singapore-based online travel agency Trip.com (TCOM) , the Indian food-delivery platform Swiggy, its German counterpart Delivery Hero (DLVHF) and DE:DHER, which is very active in emerging markets, the Indian e-commerce platform Flipkart, and other emerging-markets tech plays. At last counts, Prosus holds significant stakes in 85 tech plays.
Bob van Dijk, the CEO of both Naspers and Prosus, spun the sales of Tencent stock as a way to "rebalance our asset base towards our fast-growing non-Tencent assets," he said, "while retaining exposure to Tencent's significant value-creation potential."
It will be interesting to see whether the sale in the Tencent stake does eliminate the Net Asset Value discount for Naspers and Prosus stock. Investors into either company can benefit as they sell out of Tencent, leaving investors with a still-attractive portfolio of emerging-markets tech plays. Should only a handful boast success anywhere close to that of Tencent, and investors will be sitting on a windfall of locked and unlocked value.
Meanwhile, the announcement has knocked almost 10% off Tencent shares, already beaten down in value. Long-term investors willing to take the policy risk that's been so prevalent in China over the course of the last two years could benefit if Tencent recovers the ground it has lost since its 2021 peak.
