A move by Chinese internet giant Tencent to slim down its investment portfolio may bode well for investors, even those in SA, market players say. This comes as Prosus continues to sell down its stake in Tencent as part of an effort to fund an ongoing share buyback.
Tencent is planning to divest about $14.5bn of its $88bn listed equity portfolio, the UK’s Financial Times reported last week.
The company, which counts Naspers’s international unit, Prosus, as its biggest shareholder, is said to be aiming at reducing costs as economic growth slows amid a property crisis and zero-Covid-19 restrictions in China.
Prosus investors appear unperturbed by the move, after more than a year of value destruction caused by a Chinese regulatory crackdown.
Peter Takaendesa, head of equities at Mergence Investment Managers, said Tencent has dismissed the specific numbers mentioned by the FT article “but I don’t think they are denying that there will be some disposals of noncore assets”.
Such a move is likely to be viewed favourably by Prosus investors, Takaendesa said. “After the JD.com, Sea and other smaller transactions done so far, I think they will do more.”
In 2021, Tencent greatly reduced its stake in China’s second-largest e-commerce business, JD.com, from 17% down to about 2%. JD.com stock worth $16.3bn was distributed to shareholders.
In June, Prosus sold almost $4bn of JD.com shares, about 4% of the company, saying it did not fit into its overall strategy.
Proceeds from any disposals are likely to be used for more Tencent share buybacks so I don’t think any such disposals will be seen as negative by Prosus investors.
— Peter Takaendesa, head of equities at Mergence Investment Managers
“Tencent has clearly communicated that their strategy will focus on optimising their portfolio of investments and the cost base in their domestic businesses while they continue to expand internationally. Proceeds from any disposals are likely to be used for more Tencent share buybacks so I don’t think any such disposals will be seen as negative by Prosus investors,” Takaendesa said.
Shaun Murison, a senior analyst at IG Market, does not think the potential divestments from Tencent “are spooking Naspers and Prosus shareholders yet”.
However, he raises questions around the recent selling of R1.6bn in shares by CEO Bob van Dijk into the group’s buyback scheme in September. “This action does bode negatively for short-term sentiment.”
Murison notes that the value gap appears to have widened, which may indicate an opportunity for market players.
“The Prosus discount to Tencent now appears unusually high and could provide a relative opportunity for traders, that is, buying Prosus and selling [short] Tencent.”
This comes as Prosus continues to sell down its stake in Tencent in an effort to fund an ongoing share buyback.
In June, the Amsterdam-listed unit went back on its word not to sell more of Tencent’s stock for three years, saying it needed the money to fund a share buyback programme.
The open-ended, long-term programme, the size of which has not been disclosed, is the latest attempt by Prosus, alongside its parent, to crush a stubbornly wide gap between their market capitalisation and the value of their underlying assets.
Prosus, which has a market cap of R2.288-trillion, now owns about 28% of Tencent after selling 1.115-million shares last week.
While looking to close the discount, its move to sell down the Tencent stake is seen as being part of a broader trend of early international backers of Chinese firms, now cashing out their investments, having made billions in profits.
Crackdown
In August, SoftBank Group said it unloaded billions of dollars in shares in e-commerce pioneer Alibaba. Last week, Warren Buffett’s Berkshire Hathaway further trimmed its stake in China’s biggest electric-vehicle maker, BYD.
Naspers and its international subsidiary have been battered over the past year due to a crackdown on technology companies by Chinese authorities.
Prosus lost almost a fifth in 2021, wiping off more than R400bn as investors continued to worry about the safety of their capital in the Asian country.
The onslaught, which previously ensnared the business empire of Alibaba founder Jack Ma, leading to the cancellation of a proposed $37bn listing of his Ant Group, saw Prosus lose its spot as the biggest company by market cap on the JSE earlier this year. Once worth R4-trillion, the combined value of Naspers and Prosus is now about R2.55-trillion.
Despite the volatility of being invested in a Chinese tech company, Van Dijk vowed in March not to abandon the world’s largest internet market.
In a note, Vestact Asset Management takes a dim view of Chinese authorities’ crackdown on tech firms. “The attractiveness of Chinese stocks is waning. Early backers of giants like Tencent, Alibaba and BYD are taking money off the table. The thought of President-for-life Xi Jinping forever is not all that appealing.”
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