The value of Naspers’ 34% interest in Tencent is worth R780 billion, about the same as Naspers’ current market capitalisation.
It can therefore be argued investors buying into Naspers are paying for Tencent and essentially receiving the remaining assets of Naspers (the so-called ‘rump’) for free. The cash cow in the rump is the pay-TV business, MultiChoice, which operates DStv in SA and other African countries. Naspers has used the bulk of this cash flow to acquire and develop new internet businesses. Many of these internet businesses are still in a loss-making phase, but are well positioned to become future cash cows.
Naspers has managed to build a particularly strong presence in online classifieds. The aim with online classifieds is to become the first choice for sellers and buyers list and purchase goods and services.
There is a strong network effect that creates significant barriers to entry once dominance in a particular geography is established. The market leader can then start to monetise by selling value-added services to the 'sticky' user base. The chart below shows Naspers has established market leadership in online classifieds in most of the large emerging economies through its OLX, Avito, Dubizzle and 58.com (via Tencent) brands. These businesses are expected to enter the monetisation phase in the next few years and turn from loss-making to meaningful profit contributors for Naspers.
In India, Naspers owns a stake in Flipkart, the biggest online retail platform, and has the leading market share in online travel services through three other brands. It owns a significant stake in Souq, the largest e-commerce site in the Arab world, while Allegro is the largest online auction site in Eastern Europe. Buscape.com, also owned by Naspers, is the largest online price comparison site in Brazil. The list goes on and includes businesses with equally exciting growth potential.
Online retail still accounts for a very small but fast-growing share of the total retail market in emerging economies. It is difficult to determine what market share online retail will eventually command, but it is certain that we’ll see the rise of a few mega-online retailers chewing into the market share of traditional retailers. We’ve already seen it with the transfer of billions of dollars’ advertising spend from print to television to online, as well as Amazon.com’s impact on retailers in the developed world.
Trillions of dollars of traditional spend on media, retail and financial services will be shifted towards online businesses in the coming decades. Online migration is still in its infancy in emerging markets, but the acceleration of mobile internet penetration in these markets has set the stage for an explosion of growth.
Although there may be concerns around Tencent’s valuation, the company has a strong profit track record and barriers to entry created by the network effect of its social network platforms. The bulk of earnings are still derived from online games where smartphone usage is currently sustaining the growth. While Facebook and Google derive the bulk of their revenue from online advertising, Tencent has only begun to tap into this source of revenue. Strong growth in advertising revenue, coupled with strategic investments in online retailer JD.com and online classifieds business 58.com are expected to contribute towards the next stage of growth for Tencent.
Looking at Naspers’ other internet assets, the market leadership established in online classifieds has created tough barriers to entry in these countries. In online retail they are investing in logistics infrastructure and marketing to ensure that economies of scale will provide them with a sustainable competitive advantage in the future.
In my view, Naspers’ management has positioned the business well for the future. The focus has not been on maximising short-term profits, but rather on achieving market position and scale for maximum future monetisation. In some countries they are in the process of merging with competitor businesses, effectively turning a two-horse race into a one-horse race, further cementing market dominance for the future.
If I use the current listed market price for Tencent and estimate reasonable fair values for the remaining businesses in Naspers’ rump, the sum-of-the-parts value amounts to R2 490 per Naspers share, 75% attributable to Tencent.
Although I cannot ignore the valuation concerns around Tencent, I find some comfort in the attractive discount that Naspers trades to its sum-of-the-parts value and further potential upside to the value of the rump assets given the scale potential of these businesses.
Naspers’ financial strength and expertise makes it a partner of choice with rising internet businesses, enabling it to continuously exploit new growth opportunities which are not publically available.
As a whole, growth in the global economy is slow, but it is changing its shape, creating winning and losing companies. Naspers is on the winning side and I will therefore hold onto my Naspers shares in the context of a diversified portfolio – even though its performance may be volatile.
*Renier de Bruyn is an investment analyst at Sanlam Private Wealth