Why $ 200 billion stake in Tencent is a problem for South African Naspers

China’s tightening regulations on its tech sector have raised concerns among investors around the world, including in South Africa. Indeed, the country’s stock market, home of Africa’s largest stock exchange, is dominated by Naspers, a Cape Town-based company, which is the largest shareholder in Tencent, one of China’s most valuable companies.

Naspers, a once successful but modest Cape Town company, is now a global internet group with technology investments around the world. She began with interests in online publishing and retailing, and spent most of the 20th century publishing Afrikaans-language newspapers and magazines.

However, at the turn of the millennium, Naspers executives questioned whether they should move from newspapers to the digital realm.

Johannesburg-listed Naspers acquired 46.5% of Tencent for just $ 32 million in 2001, when the Chinese company was just a brave start-up. In the years that followed, Naspers’ stake in Tencent fell to around 29%.

However, the value of the stake continued to grow to a large extent, reaching around $ 200 billion in February – not bad for a humble news company at the foot of Africa.

“Naspers is basically a holding company for a big investment in Tencent,” says Gary Booysen, portfolio manager at Rand Swiss, a Johannesburg-based investment firm.

It also means that, for better or worse, Naspers now completely dominates the Johannesburg Stock Exchange (JSE). “Naspers is such an important part of our index that whenever there is a change in the stock price, it affects the index,” adds Booysen.

Naspers has a weighting of approximately 20 percent in the benchmark JSE index. The company tried to reduce its crushing weight on the stock exchange by creating a separate entity called Prosus, listed in Amsterdam, the Netherlands.

Prosus now owns Tencent’s stake in Naspers and other tech stocks, while Naspers controls more than 70% of Prosus. The latter is also listed on the JSE, with the net result being that South African investors find it almost impossible not to include one – or both of these meters – in their portfolios.

With so many investment managers relying on exchange-traded funds (ETFs) and other passive index instruments, these two stocks now underpin the country’s savings sector, according to David Shapiro, chief strategist. global equities at Johannesburg-based Sasfin Securities.

“We’ve moved into index investing, exchange traded funds and the like, and a lot of them have a lot of exposure to Naspers and Prosus,” he says.

The current collapse of Chinese tech stocks such as Alibaba and Tencent – the two most valued companies in China – has distressed their shareholders, including Naspers. With so many portfolios exposed to China, that means many South African investors can do nothing but sit back and hope the situation turns around.

“It is hurting the economies of this country and there is no way out,” Shapiro said.

Naspers herself is aware of her difficult position as a shareholder of a fugitive titan and has used some of the money paid to buy other assets in order to diversify.

This month, Prosus announced that it will buy India’s payment platform BillDesk for $ 4.7 billion, which will complement PayU, the platform Naspers already owns.

“Together, the two expect to create a financial ecosystem handling four billion transactions per year, four times the current level of PayU in India,” Prosus said in August. It also reduced its stake in Tencent, selling a 2% stake in 2018, which raised around $ 10 billion to fund other investments.

However, given the size of the company and the underlying continued dependence on Tencent for its value, the Naspers share price has continued to decline over the past year. While Tencent lost about 40 percent of its all-time high stock price, Naspers fell about 25 percent.

A constant trickle of new rules by Chinese regulators – such as limiting the number of hours children can play video games and banning private tutors from giving online lessons – continues to concern Tencent investors. .

South African investors can now only wait and hope that regulators have gone as far as they can, said Peter Armitage, managing director of Johannesburg-based Anchor Capital.

“It’s probably also close to what the regulators want to do. Probably, with hindsight, many of these changes could have been predicted. “

Update: September 26, 2021, 5:30 a.m.

About Mitchel McMillan

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