Naspers’s sell-off returned with a vengeance on Tuesday, shaving R100bn off its market value after China’s scathing criticism of the online gaming industry sparked worries that Tencent’s popular games could be swept up in a regulatory crackdown.
Shares in Naspers, which owns a 29% stake in Tencent, slumped more than 7%, following in the footsteps of Tencent after the state-owned Xinhua news agency denounced a sector that is pivotal to bottom lines in the industry, likening it to historically loaded “opium”.
Naspers, which is valued at R1.13-trillion, is still smarting from last week’s rout when China took drastic steps that all but trashed the commercial merits of the private after-school tutoring sector, the latest in a series of regulatory campaigns that have left investors with exposure to the country wondering about the fate of their investments.
The news article not only raises worries about potential curbs in the lucrative gaming industry, but has also put investors on edge at the prospect that nothing is off limits, including an opaque structure called a variable interest entity (VIE), which helps skirt Chinese rules restricting foreign investment in several sensitive industries, including technology.
“Tencent’s main business is not education, but preventing foreign capital and changing business models to non-profit is a risk factor to other industries,” said Neelash Hansjee, a portfolio manager at Old Mutual’s investment arm. “There could still be headwinds.”
Naspers owns its $200bn stake in Tencent via a VIE, set up for Hong Kong listing purposes to allow foreign investors to buy into the stock.
China has been cracking down on technology companies since the end of 2020, when a $37bn (R550bn) listing of Jack Ma’s Ant Group was cancelled.
A key part of the current crackdown is the Chinese government position that online learning businesses should be non-profit organisations and it does not want foreign capital invested in education platforms.
‘Red lines’
The severity of the recent sell-off “likely reflects the degree to which investors are re-evaluating previously held beliefs about Chinese regulators’ willingness to cross perceived red lines”, Mike Gresty, an analyst and fund manager at Anchor Capital, said in a note.
“Aside from wondering which sector may be next in regulators’ crosshairs, anxiety has also mounted around a long-standing area of ambiguity, the use of VIE structures by Chinese companies to list offshore.”
Last week, Chinese competition authorities ordered Tencent to stop exclusive music licensing deals and levied a small fine. Tencent Music was the fifth-largest music-streaming service in the world in 2020, according to market data firm Statista.
Even as Naspers has virtually erased the gains seen in the latter part of last week, the effect on the broader SA market was limited on Tuesday, given the broad strength in big-cap resource stocks.
Naspers now accounts for 15% of the JSE, according to Bloomberg data. This is down from a weighting of 20% previously.
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