Naspers, SA’s largest publicly traded group, and its Prosus subsidiary had a rocky week in the markets with almost R200bn in shareholder value lost — highlighting the risk of a single dominant stock on the JSE — as Chinese authorities clamped down on tech companies.
After losing as much as R190bn between Monday and Tuesday, the technology group has recovered some of the losses, gaining about R100bn since Wednesday.
The stock was down 1.31% on Friday at R2,822, which is 26.4% lower than its high back in February. On the same day, Prosus shares, down 18.22% so far this year, were 1.18% weaker.
This marks one of Naspers’s most volatile weeks in recent memory, caused by regulatory changes in China, a market from which the group derives much of its value.
Chinese competition authorities ordered Tencent — in which Naspers is the largest shareholder with a 29% stake — to stop exclusive music licensing deals and levied a small fine after taking similar action against other technology firms. Tencent Music was the fifth-largest music-streaming service in the world in 2020, according to market data firm Statista.
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.
The share price bounce-back from Wednesday is suspected to have been caused by a meeting held during the week with international investment banks, including Credit Suisse, JPMorgan and Goldman Sachs, where the China Securities Regulatory Commission tried to ease market fears. The regulation has come as a result of China’s tech companies growing to a point where they were yielding too much dominance.
While the billions lost by Naspers is a serious matter, especially as it accounts for almost a fifth of the local bourse, this pales in comparison with the destruction seen by its associate, Tencent.
Bright Khumalo of Vestact Asset Management says Tencent is “the world’s biggest loser by market value for July”. The Chinese internet giant’s share tumbled 20% in July, wiping out nearly $170bn (R2.48-trillion) in market value.
For some, the drama in the market brings into focus the risk associated with Naspers’s dominance on the JSE.
Kingsley Williams, chief investment officer at Satrix, says: “The sharp moves in the Naspers and Prosus share price highlight the single-stock risk emanating from Tencent, which serves as a timely reminder of the importance of remaining well diversified within your investment portfolio.”
The sell-off also affected on-demand delivery company Meituan, agritech behemoth Pinduoduo, liquor producer Kweichow Moutai and even Discovery’s partner PingAn Insurance.
In recent weeks China’s cybersecurity authority forced the removal of ride-hailing platform Didi Global’s app from online stores just days after its US public offering, which raised $4.4bn, due to data security concerns.
Tencent may also face increasing scrutiny as calls for fintech operators to improve competition and consumer rights by the People’s Bank of China last week indicate stricter oversight. Tencent, through its WeChat platform, operates a payments service.
As much as the losses felt by various sectors have hurt investors around the world, there seems to be agreement from market players that the rapid growth of China’s technology and internet giants would have needed, or at least attracted, regulatory intervention at some point.
Williams says China’s rapid economic growth is enabling its government “to evolve and adapt its regulation to ensure its growth becomes more resilient, part of which will entail increased regulation of certain business activities and sectors”. He highlights that China’s ambition to educate its people, making learning accessible, is likely to be in conflict with online educators that seek to maximise profits.
As part of the crackdown, China’s government says online learning businesses should be non-profit organisations and it does not want foreign capital invested in education platforms.
Online education has become a lucrative sector in the past year as pandemic restrictions forced students around the world to take up digital classes. Last week Gol, a corporate education content hub for on-demand training and resources, became the first tech start-up in SA to reach a $1bn valuation after it announced a $200m capital raise.
“If one puts aside these geopolitical tensions for a moment and acknowledges that the long period of light regulation undoubtedly aided the dynamism and growth of the Chinese tech sector but also allowed for a range of inappropriate practices to proliferate, the need for a regulatory reset was probably due,” Mike Gresty, an analyst and fund manager at Anchor Capital, says in a note.
Though it remains uncertain what lengths President Xi Jinping and his government may take to enforce their agenda, the attractiveness of the Chinese market for global and local investors will remain for years to come.
A billion people, a growing middle class, high smartphone penetration and increasing amounts of disposable income are enough to make those with business in China reflect, be patient, innovate, wait for the dust to settle and continue riding the wave that is the Chinese economic miracle.
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