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Naspers trades at a discount to Tencent stake

So what’s the upside?

Naspers investors are breathing a sigh of relief following the release of results from Chinese subsidiary Tencent that were better than analysts had forecast.

Net income climbed 7% to 6.88 billion yuan ($1.1 billion) in the three months ended in March, the company said in a statement Wednesday. Read the results here.

Within three hours of the release of the results the share had climbed by 3.99% to R1 847.88. Shares were up 3.6% at R1 841 by close of trade.

The share had fallen earlier this week following disappointing results on Monday from Chinese e-commerce firm JD.com, in which Tencent has a stake. The company, which is China’s largest online direct sales company, reported higher than expected revenue, but lower than expected earnings of -0.02 USD per ADS, rather than the break-even than was expected, according to SeekingAlpha.com.

Investors interpreted these results as a negative indicator for Tencent, and for the state of Naspers’ entire ecommerce portfolio. By Tuesday Naspers was trading at R1777/share, its lowest level in a month.

Although Tencent’s latest results are for the first quarter only, they are a further indication that co-founder and CEO Pony Ma is still on his way to building a massive e-commerce eco-system.

This system includes its mobile messaging platforms WeChat and QQ, mobile games, online shopping, online payments and travel services. The company is also in the early stages of its investment in internet banking company WeBank. This venture has a slightly ‘Capitec’ flavour in that it is a low cost model that targets the mass consumer market, which has been under-serviced by China’s big state-owned banks. An array of financial service products will be rolled out in time.

So the question many investors will ask, is firstly if these results are good will Naspers go back above the R2000/share it reached in April? And if so, where to from there.

The answer lies with whether you think Tencent is fairly valued or not. It’s common knowledge that Naspers investors tend to discount Naspers’ many other e-commerce investments as well as its investment in DSTV. However at the moment the Naspers share price is trading at a discount to its investment in Tencent let alone its other investments.

The calculations are based as such.

Tencent market capitalization at 1pm on Wednesday was $188 156bn.
So,

$188 156 bn * 33.85% (Naspers stake in Tencent) = $636.9 bn

$636.9 bn * 11.96 (ZAR/USD rate) = R761.9bn

The current market cap of Naspers is R744.9bn.

There is certainly blue-sky value in Tencent and the other e-commerce businesses, but there are risks too in this fast paced consumer environment. These companies are operating at the cutting edge of the consumer environment.

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COMMENTS   1

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My high school maths teacher use to say “even if your final answer is correct, you get zero for an incorrect method to get to it” and vice-versa.

Simply, the market is telling you that Tencent is overvalued.

End of comments.

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