What’s been behind the selloff of Naspers?

For the longest time management’s been unable to unlock the large discount in Nav, explains Sean Neethling of Morningstar.

PETRI REDELINGHUYS: We now speak to Sean Neethling about Naspers. Sean, Good morning.

SEAN NEETHLING: Hi, good morning, Petri.

PETRI REDELINGHUYS: Thank you for joining us. I think we’ve got a tough topic, man. Originally we sort of wanted to chat around what’s been behind the selloff of Naspers – how does a lot of this sort of broader Chinese regulation impact the company? There’s a lot to talk about. Naspers was once the darling of the stock exchange, and it’s been under a huge amount of pressure since. So what do you have for us, what do you think is really going on here?

SEAN NEETHLING: I think it’s really difficult to have a conversation about Naspers without talking about Tencent, which is difficult to talk about without talking about China and tech in particular. So, trying to disentangle and trying to unwrap all those pieces is not especially simple. But I think there [are some] things obviously on the fundamental side which are relatively well known to investors.

I think, if you look at the fundamentals of Naspers’s investment cycle……1:22, the large discount in Nav, for the longest time management’s been unable to unlock that discount – regardless of how they’ve tried to do so in the past few years. And then obviously the way that most investors access Tencent or [the way that] South African Naspers investors access Tencent, is through Naspers, and through the VIE [variable interest entity] structure, which is in itself relatively contentious.

So I think if you then turn over and you look at Tencent, Tencent has come under increased pressure from the Chinese regulator. WeChat – and WeChat Pay in particular – is an incredibly strong platform which works across both retail and corporate businesses in China. It has over a billion users on a monthly basis, so [has] really strong network effects and a really incredible platform that’s used in China. That’s recently come under some scrutiny just in terms of how private information is treated on the regulator side, [the] clamping down there.

Then if you look at big tech in aggregate, on the Hang Seng indices, and you look at Alibaba and Tencent as well, there’s been an increase especially there from regulators as well – both in China and in the US.

So it’s a particularly difficult puzzle to sort of disentangle. But that I suppose in a nutshell is what’s at play at the moment.

PETRI REDELINGHUYS: Is this still one of the stocks that we have to [own]? Most portfolio managers – almost everybody – have to own Naspers. Is this still the case? Is there still a really strong case to be made for ‘it has to be almost the cornerstone of your portfolio’, because, if you think about how it’s been down-weighted in the index and you think about the challenges that it’s facing, is there a recovery story here or do we wait for lower prices?

SEAN NEETHLING: I think you can look at it historically. I think most fund managers in South Africa, particularly the ones that were, I suppose, more benchmark cognisant, would have had some exposure to Naspers because it held a fairly sizable position in the Swix. I think it was 25% at one stage. It’s obviously somewhat less meaningful today, but I do think it forms a part of most fund managers’ profiles. So I think if you look at more benchmark-agnostic managers, or value managers in particular, they’ve avoided the stock for the longest time.

I think 90% of South African managers would’ve had some exposure to Naspers and Prosus. But I also think it’s at a point now where a lot of managers are starting to look at it because those fundamentals are starting to look especially attractive if you just strip out, I suppose, the valuation part. But it’s probably overly simplistic just to look at Naspers on valuation and from a statistically cheap perspective without looking at sort of the regulatory risk and all of the, let’s call it, ‘known unknowns’ which are quite prominent at this point.

So, to answer your question, I don’t think investors are forced buyers on Naspers by any means at this point in time. I do think what you’re seeing is fund managers being somewhat more discerning, just given the fact that management’s been unable to unlock that discount, and especially the China risk at this point in time. You can probably expect that to get a bit more challenging before it starts [to get] easier. So I think that’s where fund managers are looking.

PETRI REDELINGHUYS: So it’s going to get ‘darker before the dawn’ kind of thing, although the storm is going to get a bit worse before it calms.

SEAN NEETHLING: Yes. Petri, the way we look at it is that the distribution of potential outcomes at this point in time is particularly wide. The way we’ve thought about it from a fund-construction perspective is that we have some exposure, but at this point in time we’re not adding to that. I think that’s where we really are in the way that we size and [think] about opportunity.

PETRI REDELINGHUYS: Lately it’s been really tough being in the tech space and whatever, right? We’ve seen that sort of deflation of that bubble, if you will, starting to happen; it’s been some time now. If you look at the way that some of these companies have traded you can say that overvaluation is starting to deflate a little bit. So, if you do want access to tech, particularly Chinese tech, and you don’t necessarily want to take the Naspers or Prosus path, what other options are available to us?

SEAN NEETHLING: Chinese tech, in particular.

PETRI REDELINGHUYS: Or just, let’s say, tech in general, because I know you can go and buy Chinese tech, CQQQ [Invesco China Technology], That ETF is great. But in terms of single-company options, is there anything else that’s on your radar that might be worth looking at?

SEAN NEETHLING: Sure. The way that we invest, we’ve obviously got a global opportunity set now. So what we’ll do is we’ll look at different parts of the market, I suppose, where investors have made too much good or bad news into prices. So tech is not something which at this stage is particularly appealing to us. China does stand up specifically because valuations have come in over the last 12 months or so, and that really started with sort of tech regulation towards the end of last year.

Then we also look at US tech because, again, like you mentioned, Naspers is part of most South African investors’ portfolios. It’s been very difficult to get global investor[s] without having some exposure to US and US tech in particular, and we’ve seen some of the earnings coming for companies like Netflix recently missing numbers and ……7:20 under pressure, and then also announcing some potential changes to the way they could do business. So the economics of those businesses don’t look nearly as attractive as well, just being priced in ……7:31 previously.

But, I suppose, to answer your question, there are no let’s call it standout names for us at this point in time in the tech space. We’ve largely been overweight sectors like energy and financials. We just find better value there. So I think we typically move to those parts of the market that are somewhat, let’s call it, less frothy than I suppose tech.

But China does stand out at this point in time and is part of our conversations, particularly because prices have come off and potentially they’ve run a bit ahead of themselves in terms of what investors are expecting.

PETRI REDELINGHUYS: So maybe a time to start sort of nibbling at Chinese tech, but not yet the time to jump into the swimming pool. It’s probably wise to think that this conflict between Russia and Ukraine is not the cause of inflation. It has absolutely contributed to it. But if it continues to escalate, it might continue to be a lot more volatile, and we don’t really know how the market’s going to react. So you don’t actually want to be taking too much sort of equity risk at this point. At least that’s my two cents [worth]. I don’t know if you agree with that sentiment.

SEAN NEETHLING: Yeah, sure. I mentioned a relatively wide distribution of potential outcomes in terms of how this scenario can play out. Geopolitical risk is certainly one thing and there are a few issues which are tied into that. Obviously China [is] fairly close to aligning with Russia to a certain extent, but then you are looking at potential sanctions from that. There’s also the Taiwan issue which has been in the background. So geopolitical risk is, again, quite difficult to disentangle at this point.

Then, like I mentioned, the other risks that you throw in there are pretty much your antitrust regulations, which are ongoing. There are pretty much data-security issues. And, looking at our private information ……9:30 in China the VIEs have been problematic for most investors for some time, or less understandable than what they should be.

So there are a few of these issues at play, and I think since the start of the year geopolitical risk has become more prominent. So I would agree with that.

PETRI REDELINGHUYS: Okay, cool. Thank you very much for chatting with us this morning. Unfortunately it’s all the time we have. I hope you have a great day. Thank you for joining us so early.

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Doesn’t really answer the question of who is behind the selloff! If you lie down with dogs you must expect to end up with fleas! ….the Chinese are not the most reliable business partners in my opinion. In fact, none of the BRICS countries are trustworthy and reliable business partners it seems! We should have got out of this Club a long time ago – sadly we are now tarnished with the BRICS brush and seen as unreliable inspite of our enormous potential – such a pity!

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