Imagine investing in the fastest-growing tech companies globally in food delivery, fintech and education technology, all sectors that grew rapidly as a result of the pandemic. Imagine investing in the largest stock in South Africa, the largest consumer internet company in Europe and the largest Chinese company by market cap, all of which also happen to be grossly undervalued. This is what you get by investing in Naspers Ltd. (NPSNY, Financial) and Prosus NV (PROSY, Financial), a European holding company which is majority owned by Naspers, with a primary listing on the Euronext Amsterdam.
Prosus happens to be the largest shareholder of Chinese tech giant Tencent Holdings (TCEHY, Financial), with 28.9% of the company. Naspers and Prosus are also sometimes compared with Softbank’s (TSE:9984, Financial) Vision Fund, one of the world’s largest tech investors with stakes in education technology, fintech, online classifieds and food delivery companies around the world, including in red-hot markets like India, Russia and Brazil.
Besides Tencent, Prosus’ diversified portfolio of investments include: Avito (Russian classifieds), Brainly (Polish edtech), BUX (Europe’s fastest-growing neo-broker), BYJU’S (world’s most valuable education tech company, based in India), Bykea (Pakistani ride hailing), CodeAcademy (U.S. online coding edtech), DappRadar (decentralized app discovery), DeHaat (Indian farm-supplier marketplace), dott (Netherlands micro mobility), ElasticRun (Indian retailer commerce), Eruditus (Indian education tech unicorn), Honor (caregiver platform), iFood (Brazilian food delivery unicorn), Klar (Mexican financial services), LazyPay (Indian buy now, pay later), Meesho (Indian social commerce), OLX (online classifieds), PayU (Indian fintech), Red Dot Payment (Singaporean payment gateway), SimilarWeb (U.S. digital intelligence provider), Skillsoft (U.S. education tech) and Swiggy (Indian food delivery). Listed companies include Mail.Ru (MLRYY, Financial), Trip.com (TCOM, Financial), DeliveryHero (DLVHF, Financial) and most recently Remitly (U.S. remittance).
Since Naspers’ net worth is tied up in its non-South African investments held by Prosus, both companies represent the same set of assets distributed across two different stocks.
In 2001, in what is arguably one of the greatest venture investments of all time, Naspers made a $32 million investment in Tencent, a stake that is now worth $160 billion today. Currently, Naspers owns 28.9% of Tencent, whose market cap is around $557 billion.
As a result of this investment, Naspers became the largest stock in South Africa, making up a large percentage of the Johannesburg bourse (around 25%). This caused a problem - South African asset managers tracking the index were forced to sell the stock to de-risk their portfolios. The forced selling caused Naspers to trade at a large discount to the value of their Tencent stake alone, without taking into account the Naspers’ tens of billions of dollars in other high-growth tech companies.
In an effort to close the discount gap, Naspers spun out Prosus, listing it in Amsterdam in 2019. By spinning 27% of its assets into a company held on a larger exchange, Naspers hoped that this would reduce its size on the Johannesburg bourse, giving the company room to grow toward its net asset value. The spinoff helped reduce Naspers’ size to 16% of the exchange. The company owned about 73% of Prosus at the time of the spinoff, with public shareholders owning the remaining 27%. However, both Naspers and Prosus continue to trade at large discounts to their holdings in Tencent and other companies.
Both companies continued to make moves to close this gap by repurchasing over $5 billion worth of Naspers and Prosus stock since November 2020. In April 2021, Prosus sold off about $14.6 billion in Tencent shares, lowering the company’s stake in the Chinese giant from 30.9% to 28.9%.
Additionally, Naspers launched a share swap deal with Prosus to further reduce the impact of its 29% ownership in China’s Tencent. Tencent’s surging share price over the past year has caused Naspers to once again balloon to nearly a quarter of the Johannesburg bourse, forcing South African investors to sell shares to avoid concentration risk. With this share swap deal, Prosus has offered to buy 45% of its parent in exchange for its own shares, giving Prosus a 49.5% interest in Naspers, doubling its ownership of the group’s outstanding global internet portfolio to 60% and raising the free float of what is already Europe’s largest internet group to $100 billion.
With this move, the group hoped to move part of the companies’ assets out of South Africa, rebalancing Naspers size on the Johannesburg bourse and providing head room for long-term growth. Naspers will continue to retain voting control of Prosus, owning around 57% of the company.
Why they are undervalued
Based on the market value of Tencent and a recent summary of the company’s non-Tencent assets, Prosus is estimated to be at a 22% discount to the value of its assets, while Naspers is trading at a whopping 40% discount to net asset value. This does not factor in the possibility that the main underlying asset of Tencent is materially undervalued. Given that Tencent itself is down 40% from highs, that’s also a strong possibility.
There are a couple of reasons why I believe Naspers and Prosus are undervalued and that this is a great time to invest.
- China: China continues to be one of the fastest-growing economies in the world with a huge population and emerging middle class. However, the country’s recent regulatory crackdown has given investors pause. Investors are looking for exposure to China without having to invest in the country, so Naspers and Prosus arguably represent the best way for doing so. The companies’ 28.9% ownership of Tencent gives investors access to a conglomerate with high-profit businesses in gaming, social media, fintech, cloud and streaming. It also gives them more than just exposure to China’s largest company; Tencent is one of the strongest late-stage venture investors in the world, with large stakes in the best technology businesses both within and outside the country. Examples include SEA Ltd. (SE, Financial), Tesla (TSLA, Financial), Snap (SNAP, Financial) and many others. Given its recent selloff, it’s also likely that Tencent itself trades at a discount.
- High growth tech companies: Prosus has a track record of making successful investments, a notable example being Flipkart, which it sold for $2.2 billion at an internal rate of return of 32%. Tencent is not the only ace in Naspers and Prosus’ hand; the companies also have large stakes in high-growth tech companies around the world. Examples include OLX (online classifieds), a 40% stake in Swiggy (Indian food delivery startup valued at $5.5 billion), a 55% stake in iFood (Brazilian food delivery company valued at $1 billion in 2020), a 26% stake in Delivery Hero (market cap of $31 billion), 21% in Remitly (Remittance startup with market cap of $7.8 billion), BYJU’s ($18 billion), Mail.ru ($4.9 billion) and a $1.8 billion stake in StackOverflow, among others. According to Prosus’ fiscal 2021 earnings results, the company's non-Tencent portfolio posted impressive growth.
- Moves to close valuation gap: Both Prosus and Naspers have made attempts over the last year to close the valuation gap. It started with a $5 billion share repurchase program in November 2020, a trimming of the company’s stake in Tencent by selling about $14.6 billion in Tencent shares and the recently announced share swap deal between Prosus and Naspers that seeks to reduce Naspers’ size on the South African stock exchange and increase Prosus’ free float.
On the flip side, prominent skeptic Ken Rumphs from Jefferies believes the discount is justified for a number of reasons. For instance, Prosus and Naspers are effectively venture capitalists with a high-risk, high-reward structure and a lack of cash flows to match. Both companies’ complicated ownership structure, where insiders have a controlling stake, is also not one that gives shareholders confidence or transparency.
There is little doubt that Naspers and Prosus represent tremendous long-term value. Unlike a traditional venture investor, the two companies are in a position to take some truly long-term bets. The companies’ have a history of making some terrific investments that have paid off, and they continue to make bets in rapidly growing sectors (delivery, fintech, edtech) and geographies. Once you factor in their Tencent investment, which itself represents a basket of high-growth companies worldwide, the value is most definitely there.
Timing-wise, the group has also been making very smart moves in an effort to close the valuation gap in recent months, so it’s clear that closing this gap for shareholders is a priority for management.
Given their investing track record and efforts to realize value for shareholders, my recommendation for Naspers and Prosus is buy.