Asset managers have had a good run so far this year. The JSE Top 40 increased by 9.5% in the first two weeks of 2023 – very close to many funds’ benchmark of inflation plus 3%. Give it another week and fund managers can take the rest of the year off.
While equities worldwide, across all sectors, started the year on a positive note, the SA market jumped largely as a result of the recovery of only one share.
More than 10 000km from the JSE, Tencent recovered sharply on the Hong Kong Stock Exchange as investors focused on the positives of expectations of renewed growth in the Chinese economy and state authorities giving Tencent new scope to conduct business.
Tencent’s share price doubled within the space of a few months, from a low of HK$190 at the end of October 2022 to the current HK$382.
Read: Tencent shares nearly double from October low as crackdown eases
Naspers and Prosus followed. Naspers increased 91% from R1 754 to R3 360 and Prosus by 77% from R784 to just short of R1 390.
The JSE Top 40 increased to a record high of 73757. The record probably holds even after adjusting for inflation.
The good news should however come with a lengthy disclaimer – nobody knows what is really happening in China or what might happen next.
Will Tencent keep on running, considering that the share is still way below its record high of above HK$700? Or will the new dispensation of the Chinese government taking ‘golden shares’ rein in unbridled capitalistic excesses?
The Chinese government took strong action against tech companies during the last few years to limit their growth, their influence on society, and the perceived power of their multi-billionaire founders. In the case of Tencent, government banned the launch of new online games, ordered Tencent to limit the hours that kids can spend online playing games, and took a very hard look at Tencent’s financial applications.
Tencent tanks to pre-Covid levels (Mar 2022)
Tencent disappoints after lockdowns, crackdown wipe out growth (May 2022)
It even placed restrictions on Tencent’s online educational offering, citing concern about the contents and the fact that children are spending too much time online.
When announced, these restrictions caused Tencent to crash, and the recent easing saw it recovering.
Investors seem to be happier with the Chinese government’s latest scheme to exercise control by ‘acquiring’ a small interest in tech companies and insisting on a seat or two on the board of directors, rather than forceful regulations.
Investing website Seeking Alpha describes these management shares as follows: “In China, the stakes purchased are known as ‘golden shares’ which are really specialist voting shares. Some reports indicate these shares include a board seat and the ability to review content.
“Now, although in the west this may seem intrusive, there is no doubt that it will be positive for the stock price.”
Investors are probably hoping that the government representative on the board will relax their communist principles and be more likely to see the tech company’s view of things, and focus on the Chinese government’s stated policy of allowing tech companies to grow.
Vaughan Henkel, head of securities research at PSG Wealth, isn’t convinced. “Our concern is that nobody really knows what is happening in China.
“Anybody who says they do have insight is … well, being naughty,” says Henkel, describing the Chinese government’s action as a “regulatory risk” that has the potential to affect Tencent, Naspers and Prosus significantly.
He says the new policy of the Chinese government taking a golden share (in Tencent and other tech companies) is concerning. “They are essentially embedded in the company. They can change the strategy without properly reviewing alternatives. Shareholders will never know what the alternatives were.
“We remain cautious towards Naspers and Prosus. The share prices did go up, but factors that affect the share prices are out of management’s control.”
Read: Alibaba, Tencent fall on report Beijing taking golden shares
Henkel adds that traditional financial theory as far as share valuation goes “does not hold” true when looking at Tencent and, by implication, Naspers and Prosus.
It is better
Sithembile Bopela, investment analyst at FNB Wealth and Investments, seems more upbeat.
“The stocks have had a strong run in line with the general rebound in tech as sentiment around a full reopening of the Chinese economy, following the removal of the country’s strict zero-Covid policy, has boosted optimism for economic recovery,” she says.
“This is particularly positive for Tencent, which of course is highly exposed to China [as is the case for Alibaba].
“The state’s pro-growth measures should be positive for the stock – progress in the regulatory landscape, improvement in consumer confidence and general consumer spending, as well as higher advertising expenditure from business clients, are on the horizon,” says Bopela.
“The stocks have also made good rebounds from last year’s lows which has also supported a meaningful narrowing of the discounts at which both Naspers and Prosus trade relative to Tencent.”
She notes that Tencent represents more than 70% of Prosus’s net asset value (NAV).
“Naspers currently trades at a 33% discount to Prosus’s underlying listed investments, while Prosus trades at a 13% discount to its underlying listed holdings.
“On a valuation basis, because of the strong rally, the forward price-earnings ratio for Tencent is now 22.3 times, compared to a multiple of around 13 times at last year’s lows in October.
“This is still tracking below its long-term historic average, hence we still see some upside potential. Naspers and Prosus are now trading above their historic averages, but the stocks could still find support on the back of Tencent’s growth narrative,” she adds.
“Overall, we remain positive on these stocks long-term, although we acknowledge that near-term risks around a possible recession could result in a pull back in – a buying opportunity for long-term investors,” says Bopela.
Henkel says that nominal prices do not really matter and that shareholders will benefit as long as Naspers/Prosus keep on buying shares back while they are trading at big discounts to NAV.
On 4 January, Naspers said in a Sens announcement that it has, to date, sold $7.2 billion worth of Tencent shares in terms of its share repurchase programme in its strategy to reduce the discount.
CEO Bob van Dijk said in a presentation to shareholders and analysts early in December 2022 that Naspers calculated that the share repurchase programme increased NAV by some 7% in the first year and would add the same to NAV for the next two years.
Prosus cuts Tencent stake in latest pullback from Chinese firms (Sep 2022)
Tencent rant, Sea pay freeze hint at deepening gaming crisis (Dec 2022)