PROSF - Naspers And Prosus: Printing Money In Vain

2023-10-26 17:28:54 ET

Summary

• Given the ongoing buybacks at all levels of the triad, we should expect Naspers to outperform Prosus and Tencent to underperform both.
• Yet this is not happening.
• In this article, I will investigate the underlying dynamics and propose a solution for the enigma.

Printing Money Should Cause Outperformance

As I have thoroughly explained in last year’s article , the large repurchase program at Prosus ( PROSY ) ( PROSF ) and Naspers ( NPSNY ) ( NAPRF ), coupled with the persistence of the NAV discount versus their Tencent ( TCEHY ) ( TCTZF ) holding, is effectively like printing money and should lead to the outperformance of both Naspers and Prosus versus Tencent, while Naspers is expected to do even better than Prosus.

This is simply due to the fact that buybacks, when large in size and done at a discount to NAV, increase NAV per share the more, the greater the discount – and the discount is higher at the Naspers level than at the Prosus level.

So here is Naspers’ performance compared to Prosus over the past 12 months:

As expected, Naspers has nicely outperformed Prosus.

Looking at the current NAV discounts (available on the respective investor relations websites of Naspers and Prosus ), Naspers still suffers (or enjoys) a higher NAV discount compared to Prosus, i.e. its outperformance should continue.

Something Is Odd

That said, the NAV discount has not shrunk over the past 12 months, which is surprising. According to my calculations and the information provided by Naspers and Prosus, Naspers shares trade at a discount which is almost identical to one year ago: 47%.

At the Prosus level the discount is 42%, i.e. even higher than 12 months ago.

Effectively, despite the massive buybacks leading to a much higher Tencent ownership per share , Prosus has not outperformed Tencent:

This strikes me as very odd. Even the much appreciated simplification (i.e. removal of the cross-holding structure) has not helped Prosus. I had actually expected Naspers to get the greater benefit from the simplification (as explained here ), but I would never say that Prosus doesn’t deserve at least some love for it. It actually got nothing. The simplification was announced at the end of June and Prosus hasn’t done better than Tencent since then.

A Possible Explanation

Prosus is even the more liquid and trades on a European exchange, it has many international investors, so in theory its valuation should be more efficient.

There is only one explanation that comes to my mind: Investors are likely switching their Prosus holdings over to Naspers. This weighs on Prosus, while boosting Naspers. However, as I said above, the overall NAV discount at Naspers has not changed. This means that investors still believe the additional risks and uncertainties due to the holding structure justify a huge discount. In the meantime, they understand that in the short term Naspers will do better than Prosus, so they are more likely to buy the South African holding and not its Dutch daughter.

This might change once the NAV discount at the Naspers level will be similar to that at the Prosus level. At that point, I would expect many Naspers shareholders to switch (back) to the more liquid Dutch holding, which might pressure Naspers’ share price and lead to a period of outperformance of Prosus over Naspers. That said, the larger the differential grows, the more Naspers shareholders will benefit from it and the buybacks – hence leading again to a continuing outperformance of Naspers over Prosus.

In addition to the internal holding dynamics, Tencent itself has been struggling as many Western investors are reducing their exposure to China. Since many investors owned Tencent through Prosus, this has likely caused some additional pressure. (These are not switchers, they are simply giving up on China.)

Conclusions

Over the past 12 months, investors owning the cheapest of the triad have done best. Today, Naspers is still the cheapest, but by a smaller margin. Hence, for some time Naspers should continue to outperform a bit.

That said, I would not expect Naspers to ever trade at a premium versus Prosus. This would make zero sense, as buybacks would at that point be more accretive at the Prosus level and the South African exchange and liquidity is clearly the less attractive one compared to Amsterdam.

Once China and Tencent return fashionable among Western investors, I would expect Tencent to be the key beneficiary, not Prosus or Naspers. The persistence of the NAV discount despite massive buybacks and an improved corporate structure shows that investors demand much more change from the holding company: My best guesses are improved capital allocation, solidly profitable investments beyond Tencent and more say when it comes to corporate decisions. While the latter is unlikely to be solved quickly, 2024 should be the first year of positive earnings from Prosus’ ex-Tencent portfolio, which should silence some of the naysayers. Effectively, the stock market is currently attributing negative value to the ex-Tencent investment portfolio. With positive earnings, this should be much harder to do.

As a result, I would expect at least some narrowing of the NAV discount over the next 12 months, with a small outperformance of Naspers over Prosus. Whether this is enough for a positive return will still depend on Tencent’s own performance.

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