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JSE Superhero No 3 – Naspers

Superpower: Trendspotting.
Tencent was the deal that changed everything for Naspers. Picture: Reuters

It’s hard to believe now that between February 2000 and October 2001 the Naspers share price fell from R96 to under R15. This did include the 2001 market crash, but the counter was in decline well before that.

At that point, nobody would have predicted that the former print media company would become the largest and most important listed company in South Africa. Despite the success of its pay television business, Naspers did not have an obvious path for growth.

Yet the company now dominates the JSE to such an extent that its market cap makes up nearly a fifth of the entire FTSE/JSE All Share Index. It has also been one of the most reliable counters on the market.

Read: The three stocks that have defied the JSE’s stagnation

“Naspers is a classic example of a business that has been able to evolve as economies have changed,” says Hannes van den Berg, co-portfolio manager of the Investec Equity Fund. “It used to be a print media business that went into television with M-Net. Then, through some great insight or luck, it saw an opportunity in China and got into Tencent, which now dominates its earnings profile. Now it’s at the dawn of a fourth stage of evolution, which is its e-commerce business.”

The deal that changed everything

It was in 2001 that the Tencent transaction definitively changed the nature of the company.

“Naspers’s investment performance has been driven by the exceptional value creation from its investment in Tencent, which is widely considered to be one of the best venture capital deal pay-offs ever,” says Hlelo Giyose, chief investment officer at First Avenue Investment Management. “It is hard to believe that in 2007 only 11% of company revenue was from internet businesses, whereas this is more than 80% today.”

Giyose points out that Tencent is one of the few businesses in the world that has grown its earnings per share more than seven-fold over the past decade.

“The market prices of both Tencent and Naspers have followed the consistent compound growth in earnings,” he says.

The Tencent transaction is the most compelling example of what Naspers has done so well: identify trends and changes in trends, and follow these with good management discipline.

Read: JSE Superhero No 1 – Clicks

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“Naspers’s success has been driven by a disciplined approach of investing in early stage, disruptive platform businesses within high growth markets,” Giyose says. “Management discipline is imperative at the embryonic stage as such ventures may generate many years of losses as they develop, and it is critical to know when to give up or scale up such investments.”

The Chinese wall

What has made Tencent so exceptional is that it has continued to grow in new ways.

“Tech companies can scale very quickly,” says Philip Short, Old Mutual Top 20 Fund portfolio manager. “Tencent has over one billion users, so when they bring out a new product or service, they already have a captive market of that size. That is why they are capable of growing quicker and easier than traditional businesses.”

Tencent’s dominance in its home market is quite extraordinary.

“Something like 50% of the time spent online in China is on Tencent property,” points out Patrice Rassou, head of equities at Sanlam Investment Management.

Some analysts question whether the level of growth at Tencent can continue, but Short believes there is reason to believe that it can be sustained.

“There is some contention that Tencent’s growth is going to slow down, but in fact you are starting to see new growth vectors coming through,” he says. “New areas like mobile payments and cloud services could be the biggest revenue contributors in two to three years’ time.”

Rassou agrees.

“Fundamentally, one has to believe that online will continue disrupting bricks and mortar over the long term,” he says. “You might have question marks as to how many more hours people can spend on gaming, but I think these business models evolve. They have shown capacity to move to new avenues of growth.”

Reinventing itself

Naspers is also starting to realise value from its other assets.

“The structure and strategy of its assets is becoming evident,” says Short. “Areas like classifieds, food delivery, and its own mobile payments were very nascent but you could see good, strong growth there.”

One of the company’s key appeals is the breadth of its investments.

“There are so many different areas where they can capture huge chunks of revenues,” says Rassou. “They also keep reinventing themselves. For example, food delivery didn’t exist five years ago as a business line, but now it’s likely to become very big.”

This ability to identify new niche areas for growth is why many analysts remain positive on the company, despite the exceptional run that its share price it has already enjoyed.

“While we do not think there will ever be another investment as exceptional as Tencent, we expect Naspers to continue enhancing its portfolio and unlocking value for shareholders into the future,” says Giyose. “Especially since much of the portfolio outside Tencent is priced at a negative value by the market.”

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What is not recognised here is the contribution – I would say genius – of Koos Bekker. Bekker first made a fortune for himself and many others by pioneering sattelite tv in South Africa. Then came the Ten Cent investment through a scatter-gun approach to investing in promising information technology companies in developing countries. And soon we will reap the benefits of internet commerce. Not so much luck as insight into future trends combined with judicious risk-taking. Got in in 2005 and ignored all the nay-saying by fools. Thank you Koos for giving me a secure retirement!

I have a different version – – – – Oom Koos did well, but Kango Stofberg and his team did the hard work and made recommendations accepted by the board.

I know Oom Koos and his wife would enjoy your version, but give credit where it is due.

Hans Hawinkels may be the person to thank for Tencent…..

Also David Wallerstein, Neville Meijers, Charles Searle. They were all part of the team that made that transaction happen.

If the investment failed, Oom Koos would probably blame it on these people – – – but being the lovely magnanimous friendly down-to-earth man he is, Oom Koos accepted the accolades.

Hold on – Naspers back then made investments in literally dozens of internet start up companies all over the world. Its was a gamble. And guess what – tencent paid off, and a lot of they other investments flopped. So quotes like, “genius” – “insight into future trends” and “judicious risk taking”, in my opinion is a little overstated.

Its was pure luck.

I agree – – Oom Koos wil never accept blame for the millions lost.

He seems well ensconced amongst his Broederbond mates in Stellenbosch – all singing his praises (the same who loved Oom Christo Wiese till recently)

The tower of Babelon was created by people who believe that they are gods themselves.

End of comments.

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