Readers may know I'm a fan of Naspers (OTC:NPSNY), an international stock that may be unfamiliar to some U.S. investors. After cashing in some high-flying value stocks that have soared recently, I recently added to my Naspers stake as it fell last week, even though it was already a fairly large position in my portfolio.
Here are five reasons I continue to believe in the Naspers story today, even after having realized solid gains in the stock over the past year.
No. 1: It lets me invest in China, without investing in China
Naspers is a South African company technically, but it's really an investment company whose assets mainly lie outside South Africa. In 2019, Naspers spun off all of its non-South African assets into a European company called Prosus (OTC:PROSY), retaining a 72.66% stake in Prosus while listing the rest of its shares on the Euronext exchange in Amsterdam.
One of the most interesting parts of investing in Naspers is that almost 90% of its assets lie in a single investment: its 31% stake in Tencent (OTC:TCEHY). Tencent is perhaps the best and most powerful company in China, with high-profit businesses across online video games, social media, fintech, cloud, and streaming video.
Just as impressively, Tencent is also perhaps the greatest late-stage venture capital investor on the planet, with large minority stakes in many of the best emerging market technology businesses both within and outside China -- so many that it would take an entire separate article to list and analyze them all.
The Chinese market in general also has lots of potential. It's one of the faster-growing economies in the world, and its massive population and emerging middle class means China could overtake the U.S. in terms of GDP by 2028, according to recent estimates.
Yet tensions between the U.S. and China bring risks to any Chinese investment. In fact, the U.S. recently banned U.S. investors from owning shares in a whole host of Chinese companies deemed to have ties to the Chinese military. While Tencent is not on the list and is primarily a consumer company, it's still unclear what the future may hold in terms of U.S.-China tensions, and what that will mean for U.S. investor access to Chinese companies.
However, should anything happen regarding U.S. investors' ability to own Tencent shares, U.S. investors will still likely be able to own Naspers, which owns a large 31% stake in the internet giant.
No. 2: It lets me invest in Tencent at a massive discount
One of the odd features of Naspers is that while some 85%-90% of its worth is tied up in Tencent, Naspers trades at a huge discount to the value of its Tencent stake alone. Even though Naspers is up a nice 71.5% over the past year, Tencent is up an even greater 89.6%. So even though Naspers shareholders have realized big gains, its stock has actually gotten cheaper relative to its main asset.
After a continued widening of the gap over several years, the discount is now very significant today: an incredible 50%.
It goes like this: Tencent, even after its recent sell-off, trades at an $804 billion market capitalization. Prosus' 31% ownership in Tencent would therefore be valued at $242.2 billion. However, Prosus' entire market cap is only $180.5 billion, a hefty 25.5% discount.
But the discount gets even bigger when you account for Naspers' stake in Prosus. Naspers owns 72.6% of Prosus' shares, which should amount to a market value of $131 billion, and its share of Prosus' Tencent stake would theoretically be worth $175.8 billion. However, Naspers only trades at a market cap of $97.6 billion – another 25% discount to the value of its stake in Prosus, and just over half the value of its stake in Tencent.
No. 3: I get other promising international internet businesses, too
While Tencent is an overwhelming chunk of Naspers/Prosus' value, investors shouldn't overlook the other parts of the Prosus empire, either. Prosus owns a large high-growth food delivery franchise, including stakes in India's Swiggy, Brazil's iFood, and Europe's Delivery Hero (OTC:DLVHF), a large online classifieds business (largely used auto online sales) in OLX group, payments and fintech, including India's PayU, edtech investments, including Udemy, Skillsoft, and Brainly, among others, and other e-commerce and internet-related businesses and venture investments.
Analysts estimate this collection of businesses are worth about $30 billion as of last Fall.
No. 4: Catalysts for closing the valuation gap could happen this year
It's also encouraging that management is recognizing the huge valuation gap and making moves to take advantage. In November, Prosus announced a $5 billion repurchase program, with much of it going to repurchase Naspers shares and some going to repurchase Prosus shares. That was just about all of the company's excess net cash, as Prosus held $9.9 billion in cash versus $5.7 billion in debt as of September 30.
Buying back shares at a glaring 50% discount is probably a smart idea. Prosus also discloses its share repurchases, which it's currently doing at the rate of about $150 million per week. With the program having started last November, the program could be finished by the end of June or July.
Furthermore, there could be more financial engineering moves coming up at some point once Tencent is done buying back those shares. In 2018, Naspers trimmed a bit of its Tencent stake, saying at the time it wouldn't sell anymore shares for at least three years. The three year anniversary of those sales is coming at the end of March, so it's possible the company could sell some more of its Tencent stake to fund more buybacks or other M&A in the near future.
That being said, this very moment may not be the best time, as Tencent recently pulled back from all-time highs -- which brings me to reason No. 5.
No. 5: Tencent, and therefore Naspers, has pulled back
Another reason I added to my stake last week is that Tencent recently pulled back over 10% from its recent highs, taking Naspers stock down with it. Despite the huge discount, both Tencent and Naspers tend to generally move in the same direction.
Tencent's pullback was due to a combination of investors selling a lot of internet growth stocks in favor or "reopening" plays, along with some regulatory concerns out of China. The company was recently cited by China's antitrust regulator for failing to report its 2018 investment in online education app Yuanfudao to antitrust authorities. In addition, some think that Tencent's financial business will come under more regulatory scrutiny, as China's regulators look to clamp down on digital financial services in the wake of rival Ant Financial's canceled IPO.
Tencent fell mightily on these regulatory concerns, but this isn't the first time regulators have dinged Tencent's share price. In 2018, regulators clamped down on Tencent's core online games business, but eventually began reapproving new games under new stricter rules in 2019. Tencent's game franchise went on to thrive in 2020 amid the pandemic. So in the past, these types of pullbacks have been buying opportunities.
Furthermore, the Yuanfudao citation only carried a penalty of a measly $77,000 – basically nothing. Tencent probably has over a hundred investees, so one small slap on the wrist shouldn't be too concerning. The consumer financial business has generally been run with prudence as well, and doesn't make up a huge portion of Tencent's value. Meanwhile, Tencent CEO Pony Ma generally keeps a lower profile than the more provocative Ant CEO Jack Ma and is unlikely to draw the ire of the government.
So in light of Tencent's and Naspers' pullback, along with Naspers' buybacks and potential for more discount-closing moves, I added to my Naspers stake. It can be frustrating to own Naspers if the gap doesn't close, or even widens in the near term, but for long-term investors willing to be patient, it should pay off one of these days.