Despite Naspers losing as much as R36bn in market capitalisation after flagging a drop in its key performance metric early on Wednesday, market players still say China’s Tencent, a big reason for the profit drop, will remain a key driver for the group.
SA’s largest listed company flagged a huge drop in earnings in its next annual results due to lower profitability of its equity-accounted associates — entities over which a company has significant influence but does not control — such as Chinese internet giant Tencent.
The total effect of these equity-accounted associates amounted to $2.3bn (R42.8bn) as Tencent, Naspers’ largest investment and source of revenue, took a knock from Covid-19 lockdowns and regulations in China.
As a result, the company valued at about R1.356-trillion on the JSE, said in a trading statement that core headline earnings, the group’s preferred profitability metric, will drop 25.9%-32.9% year on year to 482c-532c for total operations, and 24.3%-31.4% to 482c-532c for continuing operations in its year-end results.
Core headline earnings strips out certain non-operating items such as share-based payment expenses on transactions on which there is no cash cost.
Tencent has been a concern for Naspers and Prosus for almost three years due to a crackdown on Chinese tech companies, with investors bearing the brunt of huge share price swings.
Still faith
Bearish sentiment on China came to a head in October 2022 when the Naspers-Prosus stable experienced combined losses of more than R432bn in one day of trading, sparked by news that Xi Jinping had secured a historic third term as China’s president, tightening his hold on the economy after displaying hostility to investors for about two years.
But even then there was still faith in the Chinese tech giant’s value to the Naspers portfolio.
“The dividend received from Tencent remains a critical source of funding the investment in Prosus’ unlisted businesses,” said Alec Abraham, senior equity analyst at Sasfin.
He said Tencent “will certainly not become a headache, albeit future returns from the business may not be as high as in the past as the business was developing and aggressively growing its user base”.
Naspers, the interests of which include fintech, classifieds, education and food delivery, is aiming for its e-commerce business to become profitable in the first half of its 2025 financial year.
The consolidated e-commerce portfolio showed good growth over the past year, Naspers said, but was knocked by lower contributions from its associates, Tencent in particular.
Increasing exposure
“During the year, the group reduced its stake in Tencent from 29% to 26% and the cash acquired from those sales was used to repurchase its shares,” said Naspers.
“This transaction locks in immediate value, while increasing the group’s exposure to Tencent and its e-commerce portfolio on a per-share basis, leading to a 5% accretion in NAV [net asset value] per share,” it said.
Abraham explained that selling down its holding in Tencent has enabled Prosus to realise the full marked-to-market value of the investment in Tencent, rather than the discounted value reflected in Prosus’ share price.
In the past financial year Naspers sold off its Russian classifieds business Avito in October as many companies left the country after sanctions were implemented against Russia after its invasion of Ukraine in February 2022. The global media giant is also leaving its OLX Autos business.
“The results of Avito and those Autos businesses, where either a future sale is deemed probable or has been closed down by March 31 2023, will be presented as discontinued operations in the current and prior reporting period,” it said.
Naspers expects to release its annual results on June 27 and is upbeat about the future, saying that years of investment and growth have scaled its businesses and “each segment now demonstrates a clear path to profitability”.
After initially losing almost 4% in early trade on Wednesday, the stock regained some of the losses to close 1.66% weaker at R3,115.00. The final tally caused the group to lose R22.5bn in value on the day.
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