The two wild horses called Naspers and Prosus

Prices fell more than 60% from annual highs, to recover 20% in a single day.
We have been here before. Image: Qilai Shen/Bloomberg

After Naspers and Prosus lost more than 10% during trading on Monday and Tuesday, both shares recovered on Wednesday with gains of 21%.

For two days, investors seemed to panic about another crackdown by the Chinese government on technology companies, and forgot that Naspers and Prosus are already trading way below their net asset value.

Tencent, the biggest investment in the Naspers/Prosus stable, was particularly on the receiving end of the anger of Chinese regulators with very serious allegations of facilitating money laundering.

The market plunged along with Prosus and Naspers when news emerged that Tencent might have to pay a huge fine.

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The recovery in the share prices of Naspers and Prosus helped the whole market higher.

Not only are Naspers and Prosus the two largest firms in the main indices on the JSE, but the improvement in their share prices seems to have had a positive effect on most market sectors and shares.

The JSE overall index closed 4% higher.

Prosus recovered from the previous day’s low of R718 to nearly R870 and Naspers from R1 493 to above R1 800.

When Naspers and Prosus took a dive and dragged the whole of the JSE down, Andrew Dittberner, chief investment officer of Old Mutual Wealth Private Client Securities, simply said: “We have been here before.”

His short comment urging investors not to panic proved true within days when sentiment improved and markets turned.

The same scene of sharp turns has played out before. A few weeks ago, panic buying propelled the oil price to close to $140 per barrel, only to see it turn and drop back to below $100 within a few days.

Almost two years ago, on March 20, 2020, the JSE crashed when Covid-19 restrictions were announced in SA.

Remember how Sasol fell to R27? It’s back to R343 now, with hindsight teasing investors that they should have focused on the fundamentals at the time.

Indeed, we have been here before.

“I am sure that everyone has been taking note of the Naspers and Prosus share price movements yesterday and today [Wednesday],” says Dittberner, also pointing out that the sharp fall in the share prices was an extension of the severe downward trend going back to January 2021.

“The total decline for both counters is in the region of 62%. This follows a decline in Tencent’s share price of an equal amount over this time period. Importantly, Tencent [and by association Naspers and Prosus] are not alone, as it has been a wide Chinese tech sell-off, suggesting this is not about the fundamentals of individual companies.

“Rather, concerns around the regulatory environment and the geopolitical risks appear to be at the forefront of investors’ minds, and how they may impact the longer-term outlook for the businesses.

“Given the extended period that this uncertainty has persisted, it is my sense that market participants are extremely jittery around any form of negative news – whether noise or signal – that is published.”

It’s worth taking a deeper look …

While the rout in technology stocks on Wednesday has been described as the worst since the global financial crisis, it is important to take note of the reasons, says Dittberner.

“First, the US Securities and Exchange Commission [SEC] has identified five companies that are at risk of being delisted if they fail to comply with certain auditing requirements, despite the Chinese securities regulator saying it will cooperate with the SEC.

“The second reason is due to JP Morgan downgrading the target prices of 28 Chinese tech companies, including Tencent. Going through the new price targets, it strikes me that most of them are not far off where the shares currently trade.

“Previously, many of the target prices were north of 100% higher than current prices.

“I’ll let you reach your own conclusions on the realism of analysts’ target prices,” says Dittberner.

The sudden fall in the prices of Chinese technology shares shows that investors have been nervous about high valuations for some time. In fact, US tech stocks have been declining since the beginning of the year, with the S&P 500 Information Technology Index down 16% since January, after running hard for years.

The New York Stock Exchange’s FAANG+ index is 33% off its 53-week high after reaching a record towards the end of last year after benefitting from people working, learning and playing at home.

The index, tracking the share prices of Facebook (now Meta), Apple, Amazon, Netflix and Google (now Alphabet), also fell on Monday and Tuesday – and also recovered on Wednesday.

Source: CNBCThe decline in tech stocks follows months’ worth of warnings of unrealistic valuations, voiced by market commentators, analysts and portfolio managers.

Dittberner notes that JP Morgan recommended that investors should avoid Chinese tech stocks on a six- to 12-month view given that sentiment and technicals are driving the market.

“Thankfully, we are not short-term traders,” he says.

Tencent fell on the back of the news that users were able to transfer funds on WeChat for illicit purposes.

“Furthermore, it was also found that WeChat was non-compliant with other rules requiring Tencent to identify users and merchants transacting on the platform. The Wall Street Journal published an article stating that the business potentially faces a record fine.

“In my view, it is purely speculative for the market to wipe out 10%, around $40 billion in value, on this news,” says Dittberner.

“I doubt the relevant regulatory body takes guidance from the Wall Street Journal when setting fines for non-compliance.

“However, $40 billion would surely be some sort of record. Through the course of last year Tencent largely flew under the radar from a regulatory perspective. As a result, Tencent has significantly outperformed its peer group since the sell-off began in January 2021.”

Dittberner reiterates that investors have seen this before. Through the course of 2018 Tencent was sold aggressively due to the regulatory body not granting licences. After an extended period of drawdowns, which lasted just short of a year, Tencent recovered somewhat.

Tencent, ‘a Chinese Berkshire Hathaway’

Dittberner says in a research note that he recently described Tencent as a Chinese Berkshire Hathaway, given its sprawling investment portfolio that sits alongside its operating assets.

“As such, if we follow a similar approach to valuing the business on a sum-of-the-parts (SoTP) basis, it appears that the operating business is priced on a PE [price-earnings] ratio of 10x, which is incredibly cheap for a business of this nature.

“If we apply the discount that Prosus trades at relative to its underlying listed assets only (excluding unlisted assets or pricing them at zero), then the look through PE ratio to the operating business of Tencent is 6x.

“While acknowledging the risks from a regulatory and geopolitical perspective, we do not believe that Tencent should be trading on such depressed multiples, neither do we believe that Tencent is going to zero.

“There is significant balance sheet headroom at both Tencent and Prosus to weather the current risk-off sentiment,” says Dittberner.

He warns that it is unlikely to be a smooth ride, given the current global environment.

The last few days proved this sentiment to be right as well. That both Naspers and Prosus dropped sharply to lower than the record lows when Covid-19 caused share prices to crash in March 2020 and then added an unprecedented 20% in a single day, proves that investors are very nervous.

Market Watcher: Have stranger things happened? Sasfin’s David Shapiro weighs in …

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The first horse bucked and threw me off. The second horse ran over me. I don’t like horses anymore.

I am looking for a donkey now, but donkeys tend to bite as Steinhoff and Sasol did. Equine sports are too extreme for me. Maybe I should take up skydiving and base-jumping to calm down and relax a bit.

End of comments.

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