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Identifying opportunities amid the chaos of changing business models

Stand a chance to win tickets to the Allan Gray Investment Summit 2018 and find out why good investments can be tricky to spot in this era of change.

Our investment philosophy at Allan Gray sees us look for companies believed to be priced below our estimate of their true worth and then selling them when they reach fair value. While many interpret this simply as buy low sell high, there are important nuances, chief of which is understanding if a company is temporarily unloved by the market, or if it is facing insurmountable challenges, such as the huge structural changes in business models being brought about by  technology and e-commerce.

Innovation is happening fast and furiously and there is an incredibly quick rate of adoption of new technologies. New and often unexpected competitors are emerging all the time, putting pressure on incumbents. Uber is the most popular example, with the graph below showing how it has shaken up the yellow taxi industry in New York.

Even if you are not investing in tech shares, it is important to understand their impact on other industries. Amazon is a great example. Whenever the company announces it is entering an industry the shares in that industry typically fall – e.g. when it acquired Whole Foods Market, all US grocers lost value.

Changing lanes

A good example of a traditional business that has disrupted its own traditional model is Auto Trader Plc. The vehicle marketplace managed to migrate its successful classifieds business from print magazine to online, takings motor vehicle buyers and sellers along. This GBP3.4 billion business now gets most of its revenue from online classified spend, which has effectively replaced print advertising, as shown in the graph below.

Margins that accrue to the eventual number one player in any given vertical are very attractive. Rightmove Plc, the top online residential housing website in the UK, is another example. It currently has a marketcap of US$5.8 billion.

The success of these businesses illustrates why other companies are willing to invest a lot of money in an attempt to become the top classified player in a vertical market. This is exactly what Naspers is doing: if you look at Naspers’ market share of classified businesses in various countries and categories, as shown in the graph below, it ranks number one across many categories, suggesting that there is potential for it to become the leading player in some of these online markets. Even if Naspers can get just a few of these classified businesses to profitability, it will significantly add to its overall valuation.

Another example of disruption and how strong the tech ecosystem is in China can be found in the Chinese mobile payment market. WePay, which is Tencent’s mobile payment system, has grown massively on both an absolute and relative basis despite the incumbent Alipay’s initial dominance and resultant scale advantage. There are close to one billion users on WeChat (similar to WhatsApp) pointing to the large market opportunity.

How SA investors can access the tech sector

Other than Naspers, it is difficult to get tech exposure through local investments as there are few tech companies on our local exchange. An alternative is to invest offshore. If you do go offshore, it is important not to invest blindly into the index; rather hunt for the best value opportunities or invest through a manager who will do this for you.

Most people think “value investors”, like Allan Gray’s offshore partner Orbis, don’t invest in the tech sector but that view is influenced by the 2000 tech bubble, when Orbis had little tech exposure. Excluding this period, Orbis has historically been overweight the sector, as shown in the graph below, and is currently finding value in some US tech names and Chinese technology company Netease. Local funds, such as the Allan Gray Balanced Fund, have up to 30% offshore exposure.

Interested investors can access the Orbis funds via Allan Gray’s offshore platform. Minimums have recently been reduced to US$1 500.

The Allan Gray Investment Summit will take place on 17 July at the Cape Town International Convention Centre and 18 July at the Sandton Convention Centre in Johannesburg.

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Can someone please explain to me in simple English why there is such a difference in the price between the Naspers share ( holding 31.8% of Tencent)and the Tencent share price.
Naspers R 3400 /US$ 242. ( rate of exchange 14)
Tencent: (HK$385). R700 / US $50
Why would you buy Naspers when you can buy Tencent cheaper when most of the value is in Tencent?
Or am I missing something?

Nasper’s 31.8% investment in Tencent is worth around R 4,579 per Naspers share (at current prices). So Naspers as a whole is trading at around a 25% discount to its investment in Tencent, so the rest of the business comes for free.

The market capitalisation of Tencent (i.e. total number of Tencent shares is 3.67 Trillion HKD), of which Naspers has a 31.8% stake. That comes to around R 2 Trillion). Whereas the market cap of Naspers is around R 1.49 T (i.e. 3,400 x 438 million – the number of Naspers shares in issue).

End of comments.

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