SIMON BROWN: I’m chatting now with Craig Antonie. AnBro Capital is where you’ll find him. Craig, I appreciate the early morning. The Prosus/Naspers numbers came out on Monday. The market absolutely loved it on Monday, although I suspect they liked perhaps the selling down of Tencent. But it really is still all about Tencent. The number that struck me is that literally 125% of the profits come from Tencent – everything else, their delivery and all the other bits are loss-making.
CRAIG ANTONIE: Yes. Morning Simon, to you and your listeners. I’m always happy to be here. You’re right. Certainly it’s only real driver of earnings for the company. Outside of Tencent it’s just really the classified and e-tail components which generate positive adjusted earnings – but they’re more like a rounding error, if one compares it to the Tencent contribution, if we’re honest. Overall, as you said, the rest of the segments lost about $880 million for Naspers over the last reporting period – hardly something to be happy about.
SIMON BROWN: I take the point, and we’ve seen this with, I want to say ‘early stage’, although some of them like Delivery Hero perhaps not quite so early. You are massively loss-making for an age, and then you start to make the money. Facebook did it, for example, and then suddenly they turned on the taps and made a fortune.
If we look across their delivery, their other bits of the business there, is there proper viability? I think delivering food is a hard game and a competitive game and a slim-margin one.
CRAIG ANTONIE: I think you’re a hundred percent correct there Simon. The market clearly has doubts on the business ex-Tencent, and this is why it trades at such a massive discount to its NAV (net asset value), and this despite all the financial manoeuvring or engineering that we’ve seen over the last couple of years and that they’ve experimented with by spinning out Prosus and all the rest of it.
Everyone has a view and I’ll give you my view.
My personal view is that they’re piling cash into two hugely unprofitable businesses at the moment – perhaps not both unprofitable, but unprofitable segments.
And when you make a comment around food delivery and the other part of the business that is attracting a lot of capital at the moment in the classified section [in] OLX Autos, you really have two companies which are highly cyclical; there’s fierce competition, margins are low. If you were to ask me my opinion, I’d say you are probably coming into these businesses at the end of their cycle – if one looks in the current cycle anyway.
If one looks at the food-delivery business, it’s no secret that the golden age for companies like that was Covid, where people literally had no option but to stay home and everything had to be delivered to them. This was the time that these businesses should have been literally printing cash. Despite all of that they still were loss-making and the losses continued to grow.
If you look at something like that business, just to give you an idea of how competitive the game is, Delivery Hero had to actually exit their home country of Germany because it was too competitive. The UK business was sold to Just Eat. They opened up in China and eventually closed that business down, saying it was just insanely competitive and they couldn’t compete.
The other thing that struck me is: imagine a team a bit subdued actually about the business. They talk a lot about the opportunity, but they ultimately say, when you read the results, that they believe that this company will ultimately yield a good return on investment. That doesn’t sound helluva exciting to me.
SIMON BROWN: It comes to the point – its barriers to entry. As you’re talking I’m thinking Facebook has the network effect and, yes, Instagram has TikTok coming to eat its lunch, but it’s again got that sort of network effect. I look at this and there isn’t a classic ‘moat’, which Warren Buffet would talk about.
CRAIG ANTONIE: A hundred percent correct. I think you’ve seen that in the sector as a whole – there’s already been a heck of a lot of consolidation and really what’s happening here is companies are either stepping out of markets or trying to merge to make sure they gain that critical mass that is required to survive. But I think ultimately the problem you have in segments like this, and particularly at the moment – which is why I say I’m worried about the cyclical elements of them – is you have interest rates rising, you have economies slowing, you have the consumer under a little bit of pressure.
If one looks at the OLX segments, people have been buying cars and paying more than fair value for second-hand cars. They’ve taken on inventory into the business, and that part of the market is already starting to slow down as economies slow, consumers battle, and inventory comes back online. So you have massive investments being put into these businesses, and I personally think it’s probably at the wrong time and that’s the biggest risk.
Then, what you’re doing now to fund these investments is you selling down your stake in Tencent, which is arguably a giant of a business and has been incredibly successful for you, and one that has probably hits its low in terms of relative valuation for people that are happy to take on the risks of investing in China. Things are arguably getting better there now, I think, for their businesses and not worse.
So you’re moving from something that’s fundamentally undervalued and that is 60%-odd percent of its highs, and pushing that capital into businesses which are arguably far more competitive, far lower margin and far more cyclical.
SIMON BROWN: I take that point. That was going to be my next question: the selling down of Tencent and particularly at those price points that they’re doing it. The market liked it because it brings some cash into the business and of course they use that cash then to buy back shares, prop up Delivery Hero and like.
We’ll leave it there. Craig Antonio of AnBro Capital, as always I appreciate the early morning insights.
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