When one thinks about the big tech trends heading into the 2020s, several come to mind. The rise of cloud computing. Social media and digital advertising taking share from traditional media. E-commerce taking share from brick-and-mortar retail. The war on cash and the digitization of payments. Mobile and streaming video games. The rise of the Chinese middle class.
One company at the nexus of all these exciting technology trends today is Chinese internet giant Tencent (OTC:TCEHY). Yet despite Tencent's superior positioning in the Chinese consumer economy, the stock has underwhelmed other Chinese tech firms over the past year and still trades below its all-time highs set back in early 2018.
Yet Tencent is not my top pick to buy and hold through the 2020s. Rather, the company in mind is a stock that gives investors exposure to the upside of Tencent, but at a massive discount to buying Tencent shares directly.
Naspers is my top pick for the 2020s
South African media and investment firm Naspers (OTC:NPSNY) is my top pick to hold through the 2020s. Why? Because during that time, I expect management to take further steps to close the gap between the company's valuation and the value of its assets, which mostly consists of its 31% stake in Tencent.
Naspers hit paydirt with its $32 million investment in Tencent back in 2001 -- a stake today that's worth a stunning $143 billion – and this is after Naspers sold 6% of its stake -- or 2% in the company -- in early 2018, right when Tencent's value was topping in the near-term.
The massive success of Tencent soon overwhelmed Naspers' main South African media and television businesses, as well as its significant investments in other emerging markets technology companies.
It also created a problem, however.
Naspers' size soon outgrew its home stock market, the Johannesburg Stock Exchange. Over the past five years, its weighting on the JSE has surged from only 5% to about 25% earlier this year. This led to many South African asset managers having to sell the stock, in order to avoid concentration risk. In addition, certain indices like the FTSE/JSE all-share index, a pan-African index, caps individual stocks at 10%, and Naspers had exceeded that weighting as well.
Thus, Naspers began trading at a discount to the value of its Tencent stake alone -- a gap that rose to as much as 30% this year. And this is despite the fact that Naspers also owns significant stakes in many promising growth companies outside of Tencent as well, including:
- Food delivery companies: Swiggy (India), iFood (Brazil), and Germany's Delivery Hero (ETR:DHER).
- Payments and Fintech: including almost all of PayU, the leading digital payments provider in India.
- Other social media: including a 28% stake Russian social media company Mail.ru (OTC: MLRYY).
- Online travel: including 5.6% of Trip.com (NASDAQ:TCOM), the largest online travel agency (OTA) in China and India.
- Classifieds: Includes a slew of privately held yet profitable classifieds sites in emerging markets, Europe, and the U.S.
- Ventures: a collection of small-scale venture investments it groups together in this segment.
Lest you think Naspers is a one-hit wonder, the company has made an impressive 20% internal rate of return on its non-Tencent investments. In an investment presentation from March 2019, Naspers estimated these non-Tencent assets were worth about $23 billion. Assuming that's an accurate figure today, and Naspers' total asset value would be about $166 billion today.
Spinning off Prosus in September
Naspers took its first step toward closing the valuation gap this September, when it spun off these international internet assets into a separate company called Prosus (OTC:PROSY), which it listed on the much larger Euronext (OTC: EUXTF) exchange. After the spinoff, Naspers still holds 73.84% of Prosus, with Prosus' free float at 26.16%. The theory was that since Prosus was "unlocked" on Euronext, the value of Prosus would appreciate to the fair value of its assets. Then, by reducing its size, Naspers would have more "room" on the JSE to appreciate to its fair value as well.
That, however, hasn't happened. In fact, as of this writing, Prosus only trades at a market capitalization of $120 billion, or over 25% below the company's estimated net asset value. Not only that, but Naspers also continues to trade at roughly a 19% discount to the value of its Prosus stake, at just $72 billion.
What is going on?
There could be a few reasons Prosus is trading at a discount to its assets. After the spinoff, Prosus entered a bidding war for the UK's Just Eat (OTC:JSTT.Y). That apparently soured some investor sentiment for Prosus, as investors might have feared Prosus would overpay. However, Prosus just submitted its final offer for 800 pence, below the all-stock 916 pence offer from rival Takeaway.com (AMS: TKWY). As of this moment, it appears Prosus won't be getting Just Eat, though the final shareholder vote is in January.
Second, some investors may feel that Prosus will have to pay a hefty capital gains tax when it sells its investments; however, that's not the case. According to Dutch law, if a company holds over 5% of a subsidiary and plays a significant operational role, it is exempted from capital gains taxes. And according to South African law, if you own over 10% of an asset more than 18 months and then sell it to non-South Africans, there is no capital gains tax. Naspers benefited from this when its sold its 2% stake in Tencent in early 2018, as well as its sale of Flipkart, which was bought by Walmart (NYSE:WMT) in late 2018.
Finally, the Prosus spinoff is relatively new, and may not yet be included in several index funds and etfs. Though Prosus has been included in Vanguard and MSCI (NYSE:MSCI) index funds, its allocation is only one-quarter of its overall market cap, as Prosus is only weighted according to its 26% public float. And Prosus has yet to be added to others, such as the blue-chip Euro STOXX top 50 index. So at the very least, Prosus is underweight in index funds relative to its total market capitalization.
Therefore, it may only be a matter of time before Prosus closes its gap to the value of its net assets as investors realize the company's tax exemptions, and more buying comes in from ETF and index inclusion.
How Naspers could close the gap to Prosus
Finally, Naspers is still quite overweight on the Johannesburg Stock Exchange, even despite its 26% reduction. However, management remains committed to closing the valuation gap with further actions. On its recent conference call with analysts, CFO Basil Sgourdos said:
we will remain committed to taking further action to continue to unlock value. And that's what we're going to do. I don't want to speculate now when and what time, but I think it is definitely something that is well on the radar. We are working hard at it. And when we're ready we will come back. And buybacks are definitely one of those options.
One potential option for Naspers would be to sell more of its Prosus stock, then use the cash to buy back Naspers at the discount to its NAV, though investors will have to wait for more detailed plans from management.
The 2020s will be interesting for Naspers shareholders
Entering the new decade, not only do I think that Naspers management will find a way to close the gap between the value of its holdings and its stock price, but I also believe the core asset of Tencent will appreciate, given its excellent wide-moat businesses and underperformance over the past two years.
Of course, all of these events may take some time for patient investors to see results -- though hopefully not 10 years. That's why Naspers remains my top pick for the next decade, and why it should remain a top stock for those looking for international technology and emerging markets exposure.