Naspers shares soar as Tencent results smash analysts’ expectations

By Lulu Yilun Chen

(Bloomberg) — Tencent Holdings Ltd. posted a quarterly profit that surpassed all estimates as its marquee title Honour of Kings drove a 54 percent surge in mobile gaming revenue.

China’s largest corporation reported a 70 percent surge in net income to a record 18.2 billion yuan ($2.7 billion) for the three months ended June, exceeding the 13.5 billion-yuan average of estimates compiled by Bloomberg. Sales rose 59 percent to 56.6 billion yuan, also topping projections.

Tencent’s market valuation is near record highs, fueled by expectations it’ll continue to tap the spending power of 200 million gamers on Honour of Kings and deliver more hits. The title’s popularity helped sales from smartphone play overtake desktops for the first time. The still-nascent advertising and finance business on instant messaging app WeChat has also boosted investors’ confidence it can compete with ad-leader Alibaba Group Holding Ltd. and sustain growth.

“Mobile games revenue grew fast, benefiting from titles like Honour of Kings,” said Li Yujie, an analyst with RHB Research Institute Sdn in Hong Kong. “Advertising business also topped our expectations and grew at a healthy speed.”

Shares of Tencent rose 1.4 percent Wednesday and have gained 70 percent this year, compared with an 80 percent rise for New York-listed Alibaba.

Read also: More woes for Naspers: Tencent accused of ‘harming kids in profit pursuit’

Revenue from Value Added Services, which includes online games and messaging, climbed 43 percent to 36.8 billion yuan. Online advertising sales rose 55 percent to 10.1 billion yuan. WeChat had 963 million monthly active users, up 19.5 percent from the previous year. But the mobile version of QQ, Tencent’s other mainstay social network, had 3.9 percent fewer users at the end of the quarter.

“Tencent’s existing games and pipeline continue to draw new gamers and revenue,” Morgan Stanley analysts led by Hong Kong-based Grace Chen wrote in a report ahead of the results release. They also foresee “strong growth potential in performance advertising and surging revenue growth in the payments business.”

Naspers is feeling the love, and the burden, of Tencent: Gadfly

By Shuli Ren

(Bloomberg Gadfly) — Naspers Ltd.’s conglomerate discount is widening. Its one-third stake in Tencent Holdings Ltd. alone is now worth 27 percent more than the South African internet company’s entire market cap.

A logo of Naspers Ltd. sits on the side of the headquarters of the Media24 Ltd. building in Cape Town, South Africa. Photographer: Graeme Williams/Bloomberg

After a 70 percent increase in its stock so far this year, Tencent is valued at a whopping 54 times earnings, almost twice the 30 times for Google’s owner, Alphabet Inc. Why don’t investors prefer Naspers? The Cape Town-based company is still trading at a more reasonable 36 times profit.

Much of Tencent’s gain has been driven by Chinese investors. Over the last month alone, mainlanders bought a net HK$6 billion ($767 million) or so of the shares through the Hong Kong Shanghai Stock Connect. Their stake in the Shenzhen-based company has risen to 1.3 percent, from just 0.8 percent five months ago.

One could argue that foreign investors are more skeptical, and expect Tencent’s shares to correct after its second-quarter earnings, due later Wednesday.

More likely, though, they suspect Naspers is a one-trick pony.

The South African company’s $32 million investment in Tencent, in 2001, was the deal of the century: That stake is now valued at $128 billion. But Naspers doesn’t have another genie in the bottle. Its biggest disposal was the $3.3 billion sale of a Poland-based online auction site, Allegro, last year. Naspers bought the company in 2008 for $1.6 billion, making the annual return a relatively unimpressive 10 percent.

Read also: One hit wonder? Naspers trades at 26% below Tencent’s market value

If we strip out Tencent’s numbers, Naspers has been bleeding cash in its core operations for two straight years. Unless it can show earnings from other holdings can outpace those from Tencent, investors may think it just got lucky.

Currently, there’s no way for Naspers to monetize its stake in the Chinese company except by selling it. Tencent hands out hardly any cash — its dividend payout ratio is only 12.4 percent.

So why doesn’t Naspers offload some of its Tencent shares?

Naspers is a hoarder, quite unlike a venture-capital fund that typically trades in and out of technology assets every five to seven years. Since 2005, the company has spent $8.2 billion buying stakes from Russia’s largest classified website to India’s most prominent e-commerce provider. But disposals have been few and far between: A total of $4.9 billion, of which $3.3 billion was Allegro.

Read also: Acquisition-hungry Naspers looks to bond issue as Tencent legacy looms large

Some would say it’s sensible to retain a strategic stake in one of the world’s seven biggest technology companies. Even from a high base, Tencent is expected to increase earnings by 27 percent annually over the next three to five years, according to data compiled by Bloomberg. Owning Tencent puts Naspers in the same league as SoftBank Group Corp., which has a broader base of technology investments.

Precisely because of this over-reliance on Tencent, Naspers needs to show it’s running on more than luck. Otherwise, that valuation discount won’t close.

  • This column does not necessarily reflect the opinion of Bloomberg LP and its owners.