Naspers: significant value at these levels

10 October 2018

Naspers has lost more than a third of its value this year but it is offering significant value at these levels. The correction in Naspers share price is largely correlated to the fall in the Tencent share price as Naspers holds 31% of the shares in Tencent.

We expect Tencent’s share price to be the primary driver of the Naspers share price in the short to medium term, and we see significant value in the Naspers share price at these levels.

Tencent has fallen 38% in share price since the middle of March 2018.

There are several reasons for the drop. The shake-up of regulatory and oversight landscape within China has resulted in increased regulation as well as a bottleneck in new product approvals within China. The ‘trade wars’ are also heating up between the United States (US) and China. As a result, the entire technology sector within China has seen meaningful drops in their relative share prices over the last seven months. Alibaba for example is down 30%.

Tencent released new games that they have not (to-date) received approval to monetise which has had an impact on earnings on the short term. This will result in short-term quarterly earnings being missed. 

The recent US technology sell-off has also had a knock-on impact. Over the last three months the NYSE FANG+ Index has fallen by 20% relative to the MSCI AC World Index. As US rates have started to rise, there has been a sell-off in growth assets like Naspers with value stocks performing significantly better.

We expect the regulation headwinds to continue in China, but remain optimistic that the bottleneck issue will be resolved soon. We also believe that Tencent has been aware of the new regulations before they were announced and has taken action in order to comply.

We expect the approval process to restart soon but would expect quarter three numbers (at least) to be weaker than initially expected. While the concerns around ‘trade wars’ remain, we do not expect Tencent to be fundamentally scarred from the rhetoric and hence we think investor nervousness is overdone.

On the US technology sell-off, we believe that investors will remain interested in innovating companies taking market share across industries, which means that there is significant value in Tencent shares at present with investors with a one-year-plus timeframe.