China’s tightening of regulations for tech companies continues to erode investor confidence in this sector including in Naspers, with analysts saying this week the JSE-listed giant was likely to continue to significantly reduce its exposure in the long term.
Over the past year, the Chinese government has imposed new regulations on internet companies operating in areas such as gaming, education, e-commerce and chat services.
It introduced a series of laws to address monopolies and data security to crack down on data privacy violations and has also banned online education companies from raising capital.
The regulatory clampdown has materially affected on technology giants such as Tencent and Alibaba, wiping out billions of dollars in value.
This is affecting the JSE as Naspers dominates the bourse. On Monday Naspers’s share price plummeted 13.12% and lost R100bn in value after the Wall Street Journal reported that Tencent faced a possible huge fine due to an accusation that its mobile payment platform, WeChat Pay, violated some central bank rules.
Naspers’s share price closed 4.32% higher at R1,845.02 on Friday.
Last year Tencent, in which Naspers owns 29%, faced tighter regulatory requirements related to its gaming business; the Chinese authorities restricted the gaming time allowed for teenagers.
Since then, Beijing has widened the regulatory net as part of its “common prosperity” drive, resulting in companies having to contribute more to social security thus increasing the overall costs of operating in China, says Claude van Cuyck, portfolio manager at Denker Capital.
In addition there have been antitrust issues, with businesses such as Tencent — whose WeChat messaging app has about 1.2-billion users — coming under increased pressure.
Naspers, which bought its initial 46% stake in Tencent 20 years ago for $32m (about R477m at this week's rate) has repeatedly said it is a long-term investor in the company. Tencent is the biggest contributor to Naspers's financials, accounting for $571m in dividends for the six months to September last year.
Peter Takaendesa, head of equities at Mergence Investment Managers, said while Naspers has been reducing exposure to China by selling chunks of Tencent shares and diversifying into other countries including in Europe, rest of Asia, and Latin America, those investments are not yet contributing to group profits. Still in the early stages of growth, they are not yet big enough to materially reduce the group’s exposure to China.
“We expect them to continue to gradually reduce their exposure to China over the next decade largely for risk management purposes. Prosus [the international internet assets division of Naspers] cannot afford to exit China in the near term and even if they could, we believe it is simply not the right time to do so,” Takaendesa said.
Naspers and Prosus CEO Bob van Dijk said in November during the group’s half-year results presentation that “China is the world’s most attractive internet market with over a billion mobile internet users. And actually, the level of engagement of those users is well ahead of those in the West. Simply put, if you want to be a large consumer internet investor at a global scale you have to be deeply invested in China.”
But Van Cuyck said in the long term it may make sense for Naspers to reduce its shareholding in Tencent so it could fund other global growth initiatives.
Farai Mapfinya, CEO and chief investment officer at Aequalis Asset Managers, said the “pressure to lighten on their holding is evidently there and we anticipate a gradual offloading into Chinese hands. Tencent has become so big … that it is of strategic importance not to have too much foreign influence.”
He said the shareholding reduction is not going to be a purely business decision. “It simply has to be done for other sociopolitical issues,” he said.
Van Cuyck said regulation of “big tech” is not just a China issue but a global issue that will affect profitability and shareholder returns. However, Tencent remained an extremely profitable and valuable business.
“So you will need to accept that the challenges faced by the Chinese internet industry are not going to disappear overnight. You will need to factor this into your long-term return outlook as well as the required returns you should expect given the increased level of risk.
“So, in short, it will not end soon — but it is unlikely that the Chinese government will destroy their most profitable internet companies,” he said.
Takaendesa expects Chinese tech companies to adjust their business models in light of the regulations and adjust their cost bases appropriately.
“There is also a lot of value that can be unlocked in the Prosus and Naspers holding structures over time by removing the complicated structures that are continuing to widen their discounts to fair values. Those include further releasing some cash from their Tencent stake at the right time and turning the non-Tencent investments profitable.”
China is not the only headache for the group.
Last week, Prosus wrote off $769m of the carrying value of its 27% stake in VK, the owner and operator of Odnoklassniki and Moi Mir, two of the three largest Russian social networking sites, with 59-million monthly users.
VK also owns and operates instant messaging service Mail.ru Agent and e-mail service ICQ and boasts the largest Russian portfolio of online video games. This comes as Western countries have imposed strong sanctions on Russia over its invasion of Ukraine
