June 28, 2015 4:35 am
Investor focus centres on South African group’s next move to build a global ecommerce business
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t took Koos Bekker one bet on a little-known Chinese internet company 14 years ago to help transform Naspers from an ageing local print business into Africa’s biggest media company.
Mr Bekker spent $34m on a 46.5 per cent stake in Tencent when it was just a start-up providing instant messaging services.
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That initial investment has paid off spectacularly, helping Naspers become South Africa’s biggest company by value and its chairman Mr Bekker to become a billionaire.
Now, as the group prepares to present its annual results on Tuesday, investor focus will centre on whether Naspers’ can sustain this success as it moves into the next stage of its evolution: developing a global ecommerce and online classifieds business.
Naspers last week signalled that, including proceeds from businesses such as Tencent, earnings would likely increase by up to 30 per cent on the previous year. But analysts say the challenge for the group is succeeding with the development of its new businesses, while breaking the perception that it is a one trick pony as its holding in Tencent — diluted to 34 per cent — continues to dominate its portfolio.
The huge success of Tencent — which provides mobile gaming and messaging services — has meant the value of that holding has risen to be almost the same as that of Naspers’ $66bn market capitalisation.
As a result, performance of the South African group has become inextricably linked to that of the Chinese company, with a 98.5 per cent correlation between the pair’s share prices over the past five years.
Yet Naspers runs a hugely diverse portfolio that includes a successful African pay-television business, its old print media business and a vast array of developing ecommerce and online classifieds entities. The group provides services in more than 120 countries.
Andrew Kingston, equity analyst at Sanlam Investment Management, a long time Naspers shareholder, describes the group as an “evolving media play” in which investors are effectively gaining exposure to the non-Tencent assets for free.
“A lot of people see it as a high-risk investment because they look at Tencent and it’s so expensive,” he says. “But if you look back, Naspers has been successful in a number of other areas. The Chinese market is just so big and Tencent’s success dwarfs everything else.”
When Naspers’ share of Tencent’s revenue and ebitda is included, it accounted for around a third of Naspers’ R105bn ($8.6bn) turnover and 62 per cent of its ebitda in the financial year ending March 2014, says Sarine Barnard an analyst at Investec Asset Management, which substantially increased its holding in Naspers last year.
Although Tencent’s value has soared, many of the ecommerce and online classifieds businesses are in developmental stages and not yet making money. Naspers’ ecommerce business reported a 64 per cent increase in revenue in the last financial year, but a trading loss of R5.5bn.
Naspers’ online classifieds footprint covers about 40 countries and it is a market that analysts describe as a “winner-takes-all” model, which requires time and money to establish a leading position. That means reinvesting cash generated by its profitable businesses, like the pay TV unit.
“It is definitely not without risk, especially in a world where things are moving so fast,” Ms Barnard says.
But she adds that Naspers’ has a proven record of entering new sectors, as well as a “stomach for risk,” and so the company is “happy to reinvest if they think the business case is there”.
The group invested R4.4bn on ecommerce acquisitions in the past financial year, including buying Indian online ticketing platform RedBus and increasing its holding in Indian ecommerce site Flipkart. It has snapped up 45 per cent of Dubizzle, an online classifieds business in Dubai
Driving the business development is Bob van Dijk, who succeeded Mr Bekker as CEO last April. The 42-year-old had been the group’s senior ecommerce chief and had previously headed up eBay’s German operations.
Under Mr van Dijk’s stewardship Naspers took a significant step in its quest to become a major player in the online classifieds sector when it reached an agreement with Schibsted, the Norwegian group and its fierce rival, to form joint ventures covering emerging markets. This includes Brazil, where the two had been competing head-to-head, Indonesia, Thailand and Bangladesh.
Richard Barker, an analyst at Credit Suisse, says he expects most of the ecommerce and classifieds sites to be successful, but adds that “there’s still a lot of execution risk and they take a long time to start generating revenue”.
“They are probably halfway through the ecommerce challenge already. We are at the point where the biggest part of the investment hump is probably now. Obviously there’s still a long road to go,” he says.
“But they understand the business model pretty well and they know where they want to go.”
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Tencent trades at a premium to both Hong Kong-listed shares and Chinese internet stocks listed in the US. Its forward price to earnings ratio of 33.6 times compares to 26.9 for Baidu and 31.8 for Alibaba, writes Josh Noble.
The MSCI China index, in which Tencent is the largest constituent, trades at 11.5 times forward P/E.
Analysts attribute the higher valuation to a range of factors, such as wider margins and consistently strong earnings growth. Alicia Yap, technology analyst at Barclays, forecasts a 31 per cent increase in net profit at Tencent this year.
“It’s the strongest player in mobile”, said Ms Yap. “It’s very difficult for anyone to challenge them.”
Tencent has also benefited from the scarcity premium attached to being the only large tech stock listed in Hong Kong, and the fact that — as a member of the MSCI China — it is tracked by billions of dollars invested in passive funds. That could change when US-listings, such as Alibaba and Baidu, are added to MSCI’s China indices later this year.
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