Power, principles and profit (or lack thereof)

A look at Tencent, Naspers/Prosus and Delivery Hero, H&M, Barloworld, the CPS/Sassa/Net1 matter, and what lies behind the third global multi-billion dollar implosion in as many months.
H&M took a stand in China, and almost immediately vanished from app stores and e-commerce sites – and its shops were removed from maps used by taxis. Image: Chris Ratcliffe, Bloomberg

Nothing seems to dislodge the Tencent share price from its seemingly ever-upward trajectory for very long.

Investor jitters about the changing regulatory environment in China knocked it from its recent high of HK$766 down to HK$610 a few weeks ago.

But its latest results reminded us all of just how powerful its earnings capacity is and the fact that it will take considerable time – as well as consistent pushback from the Chinese government – to whittle away its value.

Delivery Hero

This evident resilience was no doubt behind the strengthening in the Naspers/Prosus shares last week rather than the ongoing reports of share repurchases or news that Naspers had bought an additional 20.37 million additional shares in Delivery Hero.

Naspers wants to secure its position as the single largest shareholder in the German-based food delivery group.

Delivery Hero’s share price doesn’t seem to have been affected by fallout from what has been described as one of London’s biggest ever flotation flops. The Deliveroo share price plunged almost 30% on its first day of listing.

It seems UK investors aren’t as quick to overlook governance issues such as dual-class share structures and controversial employment practices as their international counterparts.

And then there’s the small matter of an absence of profits.

H&M takes a stand

On the issue of controversial employment practices, Swedish retail group H&M appears to be in the process of disappearing from China’s virtual world after it took a stand on human rights abuses against Uyghurs in Xinjiang province.

The Chinese province has been accused of using the forced labour of the Uyghurs to provide 20% of the world’s cotton.

H&M is one of a growing number of clothing companies to publicly state, thanks to growing public pressure, that they will no longer source cotton from Xinjiang.

Almost immediately after making the announcement, H&M disappeared from app stores and e-commerce sites and its shops were removed from maps used by taxis.

Nike, Adidas, Burberry and Uniqlo are also facing a backlash in what is their fastest-growing market.

As one commentator remarked, it is becoming increasingly difficult to take a bold stance on social and governance issues in the West and overlook alleged genocide in China.

The Uyghur problem also looks set to kill the recently signed EU-China investment treaty as increasing numbers of EU countries are being pressured to take a stand on the issue. Unsurprisingly, China is not one bit pleased about this.

The CPS/Sassa/Net1 matter

On the subject of controversial governance practices, last week’s Constitutional Court ruling on the Cash Paymaster Services (CPS) case could cause some headaches for parent Net1.

The ConCourt’s ruling relates to the long-drawn-out dispute over CPS’s handling of the South African Social Security Agency (Sassa) contract for the payment of social grants, which it was illegally awarded.

Specifically, it relates to an audit by accountants Rain of the expenses, income and net profit accrued under the invalid contract. Rain had been appointed by Sassa to undertake the independent audited verification of the accounts in terms of a ConCourt ruling in 2017. That ruling stated that the profits earned by CPS had to be repaid to Sassa.

Rain’s audit revealed a surprisingly paltry level of profit, prompting Freedom Under Law (FUL), a not-for profit organisation that aims to “promote democracy under law”, to launch an application to the ConCourt for a proper audit of the illegal contract.

FUL contends that CPS and its auditing firms KPMG and Mazars prevented Rain from getting access to the necessary financial information and this has resulted in Rain understating the profits by as much as R800 million.

The ConCourt apparently agrees with FUL and last week ordered CPS to provide Rain with all of the necessary information.

During the legal battle Rain’s auditors complained that they had been denied information relating to other entities in the Net1 network of companies. The suggestion was that profits might have been siphoned out of CPS as payment for ‘licensing fees’ to Net1 or other of its entities.

A robust audit would be needed to prove – or disprove – this.

Meanwhile, CPS has been put into liquidation. And Value Capital Partners has emerged as the controlling shareholder of Net1. So, interesting times ahead for all concerned.

Barloworld’s identity crisis

Barloworld’s upbeat trading update for the five months to end-February received a fairly cool reception from investors.

Until early March, calendar 2021 had been a good year for the share, reaching a high of just over R100 at one stage before dipping back to R85; it recovered briefly but dipped on the release of the update.

Perhaps investors are a little unsure about exactly what Barloworld is these days.

Its strategy “to sustainably double its intrinsic value every four years” has puzzled some and could see it continue on its recent spate of asset acquisitions and disposals.

Diversified packaging group Nampak, which in an earlier life was a subsidiary of Barloworld, which was then an industrial conglomerate, enjoyed a slightly better response from investors when it released its trading update last week.

The share price edged up 1.6% to R3.20 on news that things had not gone pear-shaped during the five months to end-February and that group financial performance was largely in line with expectations.

‘Insane leverage’

As South African investors watch the third global multi-billion dollar financial implosion in three months they must be hoping local financial regulators have a tighter grip on things that their global counterparts.

Few people had heard of the US-based Archegos ‘family office’ until, in late March, it imploded as a result of a highly leveraged exposure to ViacomCBS.

Similarly we knew little of London-based Greensill Capital, which dramatically filed for bankruptcy in early March.

And in late January Melvin Capital had to be rescued when it got caught up in the GameStop melee.

As one commentator noted the three crises had one thing in common – leverage.

“Insane leverage employed to maximise private gain, provided by lenders that can socialise losses,” was Second Foundation Partners CIO Ben Hunt’s excellent description.

Of course if the big global regulators don’t get a better handle on leverage, it won’t really matter how well our own regulators are doing.



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I’d caution against giddyness about European expansion by Prosus. EU regulators have shown their apprehension for foreign digital innovators. It could easily become a scapegoat for China animus.

End of comments.



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