Longtime readers may know I think that Tencent (OTC:TCEHY) is the best company in China, and the best positioned to weather the current regulatory crackdown.
Yet I don’t own any Tencent shares. That’s because since I have a very long time horizon, I’ve decided to own Tencent through its largest shareholder Naspers (OTC:NPSNY), as well as Naspers’ spinoff, Prosus (OTC:PROSY).
That’s because both entities, which own a large stake in Tencent and other companies in emerging markets, began to trade at a discount to the value of their stakes in Tencent alone — not to mention their other holdings in classifieds, food delivery, fintech, and education tech companies in developing markets.
Despite management’s best efforts, that discount has only widened, to the point where the valuation gap has become truly ridiculous. Just how ridiculous, you ask?
Image source: Getty Images.
Naspers, Prosus, and Tencent: a brief history
As Tencent has grown in value over the years, Naspers began to trade at a large discount to its assets, which management attributed to its dominant size on the relatively small Johannesburg Stock Exchange (JSE).
To attempt to fix the problem, in 2019 Naspers spun off its international investments into Prosus, a holding company on the larger European Euronext Exchange, with Naspers retaining a roughly 73% majority stake in Prosus. The thinking was the spinoff would lower Naspers outsized weight on the JSE, while Prosus would trade up to fair value on the larger and more liquid Euronext Exchange. The spinoff closed the gap for a short time, but the discount began to widen again, and Naspers began to trade at a discount to Prosus.
In another move, this past summer, Prosus and Naspers engaged in a share swap, in which Prosus would essentially buy 49% of Naspers’ “cheaper” stock with its own more “expensive” stock, in an effort to further boost Prosus’ liquidity and further lower Naspers’ weight on the JSE.
It’s a bit complicated, since Prosus was buying shares of the company that owns a stake in itself, but management has simplified things for investors. After the swap, Naspers is essentially entitled to 41.3% of Prosus’ assets as of September 30, with Prosus shareholders entitled to the remaining 58.7%. Although since Prosus is currently repurchasing shares, Naspers’ ownership percentage is likely slightly higher today.
Truly massive discounts
Even as Tencent has fallen this year, the discount has actually widened to a remarkable extent. Management calculates that as of September 30, Prosus’ net asset value (NAV) was 131.20 Euros per share, compared with just a 70.68 Euro share price today – a 46% discount.
But if you look at Naspers’ entitlement to the companies’ assets, its discount is truly mind-boggling. As of Sept. 30, Naspers’ NAV per share was estimated at 6,326 ZAR per share, compared with just a 2,461 ZAR share price today, an incredible 62% discount.
Buy Tencent’s $20 billion…
Read More: How to Buy Tencent Essentially for Free