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Why we don’t own Naspers: PSG

‘We think there are better opportunities.’

The story of the JSE so far this year has mostly been the story of Naspers. The media giant’s share price has gained over 75% in 2017 and accounts for the majority of the index gains year to date.

It follows that unit trust funds with high exposure to the share have therefore been the top performers so far this year. Top 40 tracker funds have done particularly well, since Naspers makes up around a fifth of the index.

Conversely, funds that don’t hold any Naspers would have found it impossible to keep up. Since the stock has such a massive influence on the benchmark, if it is not included in a portfolio, that fund is going to lag.

An example is the PSG Equity Fund. Despite being one of the top 15 South African general equity funds over the last ten years, its year-to-date return is only 9% against the 25% growth in the Top 40.

Chief investment officer at PSG Asset Management, Greg Hopkins, says that they have been receiving a lot of questions from clients about why they don’t hold Naspers in their funds. Given how the share has performed, many people see it as a no-brainer.

The Tencent tailwinds

Hopkins says that there are two parts to Naspers – the company’s 33% stake in Chinese internet company Tencent, which is now worth between 20% and 30% more than Naspers itself, and ‘the rest’.

The company’s interest in Tencent has quite obviously been the reason for its phenomenal recent growth. The Chinese company has been incredibly successful. However, Hopkins believes one should not simply extrapolate recent performance into the future.

“There are a lot of tailwinds that have helped Tencent over the last few years,” he says. “If you look at the penetration of smart phones in China since 2011, the number has gone from 30% to 70%. Also, back in 2011 daily smart phone usage was around 22 minutes. That has gone up over fourfold to 98 minutes.”

An avatar is displayed in the Honour of Kings mobile game, developed by Tencent. The mobile smash is expected to generate as much as $3 billion in revenue this year. Picture: Justin Chin/Bloomberg

These trends have been hugely supportive for the company. However, these rates of growth are slowing.

“We don’t think they’re coming to an end, but it’s a much more mature market than it was,” says Hopkins. “So one of the big drivers of earnings is no longer there.”

He adds that while Tencent has been very successful at monetising its platform, it’s noticeable that as the company’s earnings have grown, its return on capital has started to fall.

“We also question some of the capital allocation decisions that the management team has made,” says Hopkins. “They bought a 4.9% stake in Tesla for over $2 billion dollars, which puzzled us. They spent another $2 billion buying a stake in the troubled company Snapchat. When you look at these two together, they start to potentially indicate a bit of a pattern.”

‘The rest’

The non-Tencent part of Naspers is made up of its pay TV business, print media, and e-commerce interests. At Naspers’ current market capitalisation, the market is pricing these assets at less than zero.

“Over the last ten years management has spent over R50 billion in developmental spend to try to grow this part of the business,” Hopkins says. “They’ve also spent another R25 billion on capital expenditure. So they’ve spent a total of around R75 billion in this space, and you’ve seen a big acceleration in the last few years.”

However, this part of Naspers is recording very big losses – currently around R10 billion a year.

Hopkins says that this is not necessarily a bad thing, as one can accept a company spending money and taking losses with the promise of future earnings. However, in the past the pay TV and print media businesses were cash generative and supporting the other spending. This is no longer the case.

Read: Naspers CEO marks ‘several billion’ for tech investments

“Times have changed,” says Hopkins. “The cash flows have dried up as earnings have fallen. As a result, Naspers’ management now has to go to market to raise capital to fund the spending. They have raised over R78 billion in debt and share issuances.

“So we question management’s capital allocation,” he says. “We’re not shareholders, but we would have serious issues with the way management has been incentivised. They have lots of share options, which means that they can swing for the fences. In all the spend that they are doing, they just have to get the next Tencent right and their options are worth a lot. If they don’t, their options aren’t worth much, but they aren’t going to lose any money.”

This is not the type of company that Hopkins and his team finds attractive.

“We don’t like betting on companies that are trading at 50 times earnings and betting that they will grow faster than 40% a year into the future,” Hopkins says. “That’s not our type of business. We do look at it and keep testing our thinking, but we would rather be buying businesses on 11 or 12 times earnings, where expectations are low, and we think there’s lots of asymmetry in terms of getting the odds in our favour.”

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I am not a fan of PSG but I agree.

Naspers without Tencent would be bankrupt right now. At the very least they would be splitting.

For decades they were the mouthpiece of Apartheid South Africa, aligned with the National Party and littered with Broederbonders. It is not very different today. They own in the 90% region Afrikaans media in South Africa and a very large chunk of English media too.

There are several management players in the business who move from one division to the next spreading their rubbish ideas with minimal skills and in most cases no experience from outside the organisation.

The monopoly mentality still persists within the company with the deadwood management that is there. They are still of the mindset that they have an abundance of money flowing in due to their monopolies in media and haven’t yet adapted to being able to profit the digital media world.

Their approach has always been to buy the opposition out of the market by out-bidding for coverage rights using their abundance of cash reservces.

Now nothing in the old Naspers is making money anymore. They are exclusively dependent on Tencent and at the mercy of the Chinese. They have literally been throwing money from Tencent income at anything that looks vaguely like something that might work, but nothing has as yet.

That model cannot possibly work.

When Tecent turns, Naspers will die.

Very quickly.

”Ever wonder why fund managers can’t beat the ‘benchmark’? ‘Cause they’re sheep, and sheep get slaughtered.”
Gordan Gekko, Wall Street (1987)

Hardly surprising that the pay TV side of the business is making a loss when they’re paying ANN7 to broadcast on Multichoice!! Who was stupid enough to enter into that deal?
Still believe there might be a few dots to connect there.

PSG has fair points. I also rate them and have some RA’s with them. But!

Roughly 5years ago I sold British Amercan Tobacco at 380 after listening to a well known PSG fund manager on radio who dismissed their future growth in view of smoke regulations etc etc. He made strong points and I was convinced to sell.

Look where it is today..

Who knows whether Tencent is mature or not??

I hold Naspers and PSG shares.

Not a fan of either – but given personalities would prefer Jannie Mouton over Koos Bekker. However, this is not the way to invest, I am repeatedly told by my guys.

My view on Naspers is very similar – if not for Tencent it would be in trouble. The market agrees with this view – except Koos Bekker who is still riding the wave of investing in Tencent.

Bekker’s attitude to Theo Botha and others at recent AGM shows the disdain he has for those who disagree with him.

Reminds me of PW Botha,

Perhaps selling half of Naspers and putting money elsewhere is option my guys are looking at.

Another good article though, Patrick – thanks

There we go ahead. Armchair analysts. Only a fool will believe this PSG dude. I bet in his personal portfolio, he has Naspers shares

or not.

Naspers is up 3% whilst armchair analysts keep talking nonsense

What really worries me is how important Tencent is to Naspers, and how important Naspers is to your small market. Tencent is a Chinese company that Im not sure BEE fund damagers in this country have a full grasp of. Can you imagine a serious wobble in Tencent? The risks are not being analyzed and capital appropriately allocated.

While some analyst and advisors have been telling the public why not to invest in Naspers, in reality those that wanted to take a risk in Naspers, have been making loads of money! and we don’t talk about if’s and but’s at this time.

Sometimes fund managers are wrong !

Tencent Holdings Ltd. posted its strongest growth in more than seven years, riding the success of games like Honour of Kings and a rapidly expanding internet advertising business.

China’s largest social network operator reported a 61 percent rise in revenue to 65.2 billion yuan ($9.8 billion) in the September quarter, outpacing the 61 billion yuan projected. That also marked the biggest gain in sales since 2010, when revenue was a mere one-fourteenth of its current level. Profit also beat estimates.

Tencent, the operator of the WeChat messaging and entertainment service that’s become near-ubiquitous across China, continues to deliver on hit games while pushing more and smarter advertising to its billion-plus users. The mobile battle game Honour of Kings helped it expand smartphone gaming revenues 84 percent in the period. Tencent, which has built a 12 percent of Snapchat-owner Snap Inc., is now exploring new sources of growth in the cloud, financial services and movies and music.

Oh please, leave Naspers alone… They took a bunch of crappy assets and in the face of extreme global negativity to anything that they represent, they have built a company that has outperformed massively. Praise that, rather than criticize it…

Now they have spent a lot on smaller businesses that are not yet household names, but what’s the alternative? I would argue that is where you’ll find the names of tomorrow. You’ve just lamented the spending on Tesla and Snapchat. They are up a little more than 15% on Tesla in less than a year, and time will tell how they will go on Snapchat… and Tesla for that matter. But for you they’re damned if they do and damned if they don’t…

I agree it’s not great that the vesting periods of the long-term incentives are declining, or that the return on capital is falling, but I am happy that the group is not selling out just because the structure of the firm is not liked by investors.

These PSG (can I call them) value-investors who want to buy the cheaper stocks, may want to go back to their bible… and read what Benjamin Graham says about the performance of his “growth” investment in GEICO, which he held onto long after the value attributions of the stock had disappeared.

“Ironically enough, the aggregate of profits accruing from this single investment decision far exceeded the sum of all the others realized through 20 years of wide-ranging operations in the partners’ specialized fields, involving much investigation, endless pondering, and countless individual decisions.”

The fact is that if most of you were the CEO or CIO of Naspers, the company would probably have sold the Tencent stake several years ago under your tenure (when do you think, when it was more than 20, 30 or 50% of the portfolio… mmm?). Perhaps you need to step away from Index-thinking to make money over time… I dare you.

Good luck in finding the name that will perform as well as this. Despite declining returns, the returns still exceed most alternatives available on the JSE.

Naspers made a large mistake initially in China by buying up a national internet ISP that turned out to be the definition of a lemon. But gathered their courage for a second dip in the pool and miraculously uncovered a bruiser that was more than just a consolation prize. The biggest travesty was that its shareholding in Tencent, then a simple messaging and microblogging outfit, was diluted from 49% to 34% during its listing in Hong Kong. The JSE could’ve been breaking records last year already!

To buy or not depends on your faith in Bob van Dijk and co. to make sensible purchases in their latest spree, which is not what I’d call Snapchat. Van Dijk is a company man who will play it safe. If that’s what you want in your portfolio, considering buying when he lays his cards on the table and you like his odds. I’m not convinced the food and online goods delivery business in going to pay dividends any time soon. That is a bet on millenials and economic recovery is going to determine the outcome of that dice roll.

As long as people communicate on data-based platforms and as long as youngsters play games and as long as people produce children, Tencent will make money. As long as Naspers holds significant Tencent, I’ll stay there.

Don’t care what the advisers and fund managers and analysts say about weightings, they keep proving themselves wrong.

At the end of it all, the fact is that Naspers, that is Ton vosloo and Koos Bekker, read correctly how the industry is developing and did what they could to sa Naspers (from the very sam ailmenst all newespapers companies have). that is brilliance. And tha is what entrepeneurs are for. They saved the oldest Afrikaans news house from bancrupcy. Now the also runs want it to sell off the golden goose and let the Afrikaans and other publishing businesses die. You must be crazy to think hey will do that. What I don’t like is that PSG, who is an Afrikaans newcomer, allows itself to be used in this manner to disparge a fellow successful entrepeneur. Sham on the Moutons.

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