Koos Bekker's canny investment has paid massive dividends, but will it stay the distance?
It is no small irony that Naspers, once a National Party mouthpiece in an era marked by fears of communism, has come to be defined by its purchase in May 2001 of 46.5% of a Chinese internet company.
The move proved to be shrewd and has not only paid for itself many times over but also gave birth to a multinational internet empire.
Naspers now owns 34% of Tencent, but the group's CEO of internet-listed assets, Charles Searle, said Naspers had never sold a single share in Tencent. The reduced holding was a consequence of the Tencent IPO in 2004.
Tencent's success has also played itself out back in South Africa. In just more than a decade, Tencent has become worth some $124-billion (R1368-billion) and trails only a few global tech company heavyweights such as Apple, Google and Facebook.
Last year, thanks largely to Tencent, Naspers stock shot through the roof, climbing 87% to its level of R1141/share by Friday.
For CEO Koos Bekker, often lionised as a visionary leader with a magical ability to see into media's future, Tencent has been a windfall.
Unique among his peers, Bekker opted to forgo a salary and be paid in Naspers shares instead - a "good but ballsy move", said Vestact portfolio manager Byron Lotter.
And it paid off in spades. At last count, Bekker controlled 16.3million shares in Naspers - worth an immense R18.7-billion based on the share price.
But, for shareholders, who benefited along with Bekker, the question is whether Naspers's steep upward trajectory can continue. Is the share still worth investing in?
After all, it is a dog-eat-dog affair in the internet space. According to analysts, the next five years will probably prove Naspers's mettle or result in a calamitous tumble as a would-be dominator.
Tencent recently bought almost 10% of online shopping logistics operator China South City for $193.5-million in an effort to cover all its bases in a turf war with major Chinese competitors Alibaba and Baidu. Naspers's policy is to trust Tencent's decision making.
Said Searle: "We entered China early. There were lots of false starts and many mistakes made, leading to early failures.
"Tencent was identified reasonably early on due to the number of users they were starting to attract and the 'stickiness' of their instant-messaging service. Strategically, this position looked interesting."
Searle said that a key element in Naspers's strategy was to back the best entrepreneurial management. "The Tencent team, led by Pony Ma, was the best in China and has subsequently proved to be among the best globally."
Tencent chairman Ma Huateng is now one of China's richest men with a personal worth of about $13-billion.
Fred Teeling-Smith, industrial analyst at Stanlib, said Naspers was not making its own investments in China outside of Tencent because it did not want to compete with Tencent.
"Naspers's e-commerce strategy is focused on other emerging markets, where it has been spending heavily, such as in Eastern Europe, India, Brazil and Indonesia, territories where the US giants are not yet really present," he said.
Lotter said that Tencent was like an amalgamation of Google, eBay and Facebook, none of which was present in China.
He still thinks Naspers is a great investment.
"We've been buying it continuously for three or four years. The share was labelled expensive at R350. South African investors tend to be conservative when it comes to valuations. This is half because we didn't realise Tencent's magnitude, the level of its infiltration into the Chinese market and its potential," he said.
"Facebook's valuation also helped - it was huge and we saw monetisation first hand. Tencent did that as a pioneer."
To an outsider, Naspers's share price might look expensive, considering it trades on a price-to-earnings ratio of 61 - far more expensive than the 18.4 of the JSE's all share index.
Yet most analysts still rate Naspers a buy, in the expectation that Tencent will soon begin to produce the sort of profits that South Africans rarely see, which will bring that valuation down.
Amazingly, the 34% Naspers stake in Tencent was worth R460-billion by Friday - about the same level as the R467-billion at which the whole of Naspers is valued.
So investors buying Naspers shares get exposure not only to Tencent but, for free, to the rest of Naspers's assets such as DStv, Media24, Kalahari.com and OLX.
Nadim Mohamed, an industrials analyst at First Avenue Investment Management, said few South Africans realised just how entrenched Tencent was in the Chinese market.
"Tencent has even made its own version of Google's Street View. It is protecting its market share well. Abiding by the censorship requirements in China adds to the cost base of any potential entrant and barriers to entry are high," he said.
As a result, said Mohamed, Tencent was putting plenty of effort into development to keep it ahead of the pack in a highly competitive market.
"There are extra costs to span multiple geographies, but in China Tencent has the biggest internet and smartphone penetration, and there's only one territory and language to deal with. It's a better cost structure. Cost per subscriber acquired is lower - it's a fantastic business," he said.
The trick for internet business is to turn the number of eyeballs into cash. Facebook has been struggling with this adaptation, as has Twitter.
"I think Tencent is just at the beginning of its monetisation - games, and there are plans for e-commerce and advertising. Advertising makes up just over 10% of Tencent's revenue, whereas for Facebook it's 80% to 90%, so there's more to come.
"They dominate the Chinese social network, and it's a winner-take-all scenario. The mobile messaging service can leverage the network and payments infrastructure Tencent already has set up."
But Naspers is not pinning all its e-commerce hopes on China.
"Mail.ru [in Russia], for example, is a massive asset. Naspers is hunting for opportunities. Mail.ru is similar to Mweb - it is an e-mail portal in Russia and has social networks attached to it. It offers e-mail, communications network, online social networking and has 43million visitors a month as one of the market leaders. It has 80million page views a day and has a total audience of 98-million," said Lotter.
Online classifieds, it seems, is a key focus for Naspers - and is taking up an increasing chunk of its time.
Said Teeling-Smith: "That appears to be their main strategy, and the development spend is ongoing. In my view, Naspers will either see success from this strategy within the next five years or it won't be a player in this space at all. It is a make-or-break time, and the winner takes all. The online classifieds market within each vertical tends to have only one dominant player. Naspers is gaining traction if you look at user metrics. But it's costing them money right now."
And where is the money coming from for this expansion? Ironically, from DStv.
Said Lotter: "DStv is extremely cash-generative, and management looks for a tech theme in emerging markets. Online retail has become Naspers's focus. Bekker has a great eye, and the online retail component will be massive, but don't ignore Multichoice, which is a fantastic business. It brought in R7-billion net income last year."
Foreign investors looking for arbitrage between currencies have spotted Naspers as an ideal way to get a see-through investment into Tencent with an added bonus.
Teeling-Smith said Naspers's price momentum was driven by foreign investors who look to buy into Tencent and get the rest of Naspers for free.
"It looks like a bargain, although Tencent is sitting at a price-to-earnings ratio of about 50. If you're comfortable with the mobile messaging app looking promising, then 50 is acceptable. It is the dominant social networking utility in China," said Mohamed.
"Naspers's earnings from Tencent have been spectacular. The other internet businesses are still loss-making, but this year or next will be the peak of the development cycle, and the returns will start flowing.
"This could become the biggest online business in the world, and that hasn't really been priced into the value."
Too soon to drool over unbundling
Stanlib's Fred Teeling-Smith says that from a pure valuation perspective it could make sense to unbundle Tencent from Naspers, but he thought it was unlikely to happen.
"It's an investment banker's dream to unbundle a stake that's greater than 100% of the Naspers market cap, but in reality management is still integrally involved, and there's a cross-pollination of ideas into Naspers's other internet units. They see the benefit in keeping the stake."
So it is worth Naspers's while to hang on to its stake in the company.
"The market is excited about Tencent's mobile platform monetisation - WeChat," which had a high adoption rate, Teeling-Smith said.
"The Tencent share price did run ahead of itself in terms of earnings delivery, but earnings should catch up," Teeling-Smith said.
Naspers's share price crossed the R1000 mark in December. So would a share split introduce more liquidity into the share?
This would be "irrelevant to institutional investors", which would buy in to Naspers at whatever the price.
However, for retail investors the R1000 mark "represents a psychological barrier". - Brendan Peacock
