China expert Martyn Davies reckons lots more to come from Naspers’s Tencent bonanza

Experienced journalists build a base of “go-to” guys, one refined over years through their deep knowledge – the rare pundits who never let you down with confusing chatter. When it comes to the working of the markets, David Shapiro is in a class of his own. Irnest Kaplan is my man on tech companies; Allan Gray’s Simon Marais on broad investment trends; Piet Viljoen on finding value; Andrew Levy on labour… it’s a list as long as the subject matter. My “go-to” guy on China is Dr Martyn Davies. We met some years ago through his involvement with the World Economic Forum’s Young Global Leaders programme. My respect continues to grow. Motivated by a schoolteacher who said he’d never make anything of his life, Davies completed his PhD at 25 – at the time South Africa’s youngest ever. He had the foresight to spend extended periods in China long before it became the flavour of the moment. He is fluent in Mandarin, deeply understands the Chinese culture and has a passion for the Middle Kingdom that burns as brightly as the first time he saw a conical bamboo hat a couple decades back. Davies now spends more time in China and Singapore than in his home base of South Africa, so it was good to catch up this week after his latest visit – attending last week’s WEF “Summer Davos” in Dalian. Apart from the general update on Chinese investment into Africa, I couldn’t resist getting his expert insight into TenCent, the Internet phenomenon which is one of the key reasons from the transformation of SA-headquartered Naspers into a global media group. Naspers CEO Koos Bekker and the legion of Naspers supporters will be delighted with Davies’s assessment. That part of the discussion comes towards the end of the interview. – AH 

To watch the video of  the interview with Dr Martyn Davies on CNBC Power Lunch click here.   

ALEC HOGG: Martyn Davies, Chief Executive of Frontier Advisory is here with us in the studio, just back from China. Martyn, did you see much of our CNBC team there?

MARTYN DAVIES: I did. I spent, just during our office hours/work hours and also after work hours as well.

ALEC HOGG: I heard from Samantha (Loring) that there was some dancing going on.

MARTYN DAVIES: You did? There was.

ALEC HOGG: You guys have a good time in China.

MARTYN DAVIES: Well, it’s all in the name of sort of promoting the brand of our country and our economy and investment.

ALEC HOGG: Did you have much success, though? Are the Chinese pouring more money into Africa as a result of all the WEF discussions?

MARTYN DAVIES: I’m not sure. China’s going through a policy change. The state appraiser is slashing budgets, even things like travel. So the sovereign wealth fund types, the SOE sovereign wealth financiers; even their travel’s been cut these days, particularly to Africa. So I’m not seeing any big decisions being taken this year. I think next year. This year is about repositioning. I think next year hopefully things will start to once again, be coming through the pipeline.

ALEC HOGG: That’s interesting, Martyn, because you have a perception – sitting in the African continent – that there’s just a tsunami of money coming from China that desperately wants to get into Africa. So you say it’s on hold at the moment?

MARTYN DAVIES: Dual politics underpins this relationship. The majority of the capital is from two financiers: China Exim Bank and China Development Bank. Just mentioning China Exim Bank, the CEO Mr Li Ruogu who is, not singlehandedly, but is the main driver behind China’s Sovereign Wealth fund is driving the financing thrust into Africa. He recently had his contract renewed for five years in March. That’s a key point. With him there’ll be consistency in policy at Exim bank but nevertheless, a lot of their clients and state enterprise space are increasingly cutting back their hurdle rates. Their profit-seeking is now higher. These companies are becoming more marketised. I think ultimately this will start to feed into their Africa strategy as well, not immediately, but medium-term; yes.

ALEC HOGG: What’s the status of the BRICS Bank? There was a lot spoken about it in March at the Brics meeting here in South Africa.

MARTYN DAVIES: It didn’t come up in Dalian last week at all. We had the BRICS business council meeting here in Johannesburg about three weeks or so ago. That’s the business-to-business grouping across BRICS economies (Brazil, Russia, India, China, SA). There has been increased momentum toward it, but again the stabilisation fund at the IMF see its R100bn commitment as a lot clearer than the Brics Bank at this stage. I think there’s a lot more detail to be thrashed out from what they’re calling the NDB. We thought it was going to be the BDB – the BRICS Development Bank. Now it’s being called the NDB – the New Development Bank so I think there’s a lot more work to be done on that.

ALEC HOGG: So Jacob Zuma’s dream of having a BRICS Development Bank headquartered in South Africa is perhaps a little premature.

MARTYN DAVIES: The initiative is there. The momentum started in Durban in March. I think there’s a lot of work still to be done and from a Chinese perspective at least. They’re saying ‘well, you’re wanting, BRICS are wanting…these countries are still wanting a Development Bank which lends in a more developmental fashion, financing sizeable, perhaps multi-national, regional infrastructure projects. Now that all sounds very well. If you’re sitting in Beijing the response would be ‘well, that’s what we do already. It’s called China Development Bank. It’s called Exim Bank’. So the Chinese thinking is: is this replicating something we already do and how will this coexist or perhaps even be countering our (being the Chinese) own financing infrastructure interests in Africa?

ALEC HOGG: What’s the mood like in China at the moment?

MARTYN DAVIES: I think at a business level the politicians remain pretty robust and upbeat around the economic growth prospects – still talking about 7.5% and that’s very realisable. I think the headline growth figure will become less and less important if it has not already. There’s very much a mentality of state central planning when your government sets a growth target. I think what we’ll see going forward is not so much the headline growth which is more of a quantitative figure, but more quality indicators and quality targets; employment creation, for example, maybe even inflation-targeting in China as well. So we’ll start to see a more qualitative input around this…what is increasingly a meaningless – some would say even silly – headline growth figure. And we all sweat the estimable points, whether it’s 7.5% or 6% or 2%. At the end of the day it’s actually irrelevant. At a business level there’s a lot of pain out there. A lot of consolidation is taking place. Increased marketization in a number of sectors at the moment – there’s renewable energy. Construction’s coming soon. So we see this almost – and I talk about this quite a bit – Darwinian-type economy in China, where you have the roofless competition as the economy marketises and it marketises  incredibly quickly. And with the new government post March there’s a far greater wealth to marketise and liberalise the economy even further in sectors than before, were relatively very closed.

ALEC HOGG: That 85 million Africans talk about so often; about unskilled or low-skilled jobs moving to this continent away from China: is there any momentum?

MARTYN DAVIES: I think this figure of 80-odd million jobs departing China in the next ten years came from some work by Justin Yifu Lin who is now back in Beijing as an academic at Beijing University and because of rising cost pressures and so-called Lewis turning points (cost of production outstrips gains and productivity) we’re seeing the migration of Chinese labour-intensive manufacturing at the bottom end to other regional countries. So Vietnam has become almost a sub-factory of the Chinese manufacturing machine. We’re seeing even perennially failed economies like the Philippines benefiting from this…attracting Chinese investment. Thailand and Indonesia…

ALEC HOGG: They’re all very close (geographically).

MARTYN DAVIES: Very much so. And it takes advantage – dare I say it – of the Chinese high trust diaspora as well and culture plays a major part here. Interestingly, Nike shut down its last contracting operation in China in July 2012 and they are often the first movers. So the force is there. This is the third wave of Asian de-industrialisation. We saw Japan in the ‘80’s, Korea in the ‘90’s – relatively smaller – and now we’re seeing China 20 years later or so. Its beginning, this Lewis turning point. It’s not a specific point, but it’s the beginning of a long-term trend. So the question for us in our part of the world is: Which African country is going to be the Vietnam of Africa? I think the opportunity is immense. It really is. If we put a figure out there…how many Africans work in factories? The figure may be ten million. If we are able to capture merely 10% of this maybe 80-odd million jobs – supposedly – starting in the next decade, we’ll double our industrial manufacturing labour force.

ALEC HOGG: I guess there’s all kinds of questions that flow from there: labour relations etc. But just to close off with a couple of things – and I know this is a little bit off your normal focus – but TenCent is such a big company now in the life of the Johannesburg Stock Exchange. If you own Satrix 40 you’ve got an exposure to TenCent which is a big Chinese company; 38% owned by Naspers. The stock markets over there or the valuation of TenCent: have you got a feel or review of whether it’s just the hothouse effect or really offering value?

MARTYN DAVIES: I think there really is value. At TenCent, this was a $35m investment in 2001 that Naspers made into TenCent – a Shenzhen-based company – five individuals; all of them who had signing power on that account, I believe. They didn’t so much have a plan or a budget really and in 2003 went to IPO in Hong Kong. Today that stake is probably worth about USD13bn/USD14bn.

ALEC HOGG: Yes, the Naspers stake is worth R372bn.

MARTYN DAVIES: There you go. Bloomberg Business Week Magazine called this the greatest private equity investment ever in history, and done by a South African company based in Cape Town, into China. The numbers are staggering. You have 650 million people online now in China. I was hearing at the forum (World Economic Forum in Dalian) last week – it was a presentation on ecommerce in China – the numbers are absolutely staggering. There’s indication that in two years’ time – and obviously TenCent is well-positioned toward this – in two years’ time the ecommerce market in China will have surpassed that of the United States. That’s how big it is. It’s phenomenal. The numbers I wrote down, but it’s something. It really is.

ALEC HOGG: So you’re sold on the story?

MARTYN DAVIES: This ecommerce online story in China is an undeniable force.

ALEC HOGG: Well, thanks for giving us that insight. When you’re in a country like this and you see an explosion in the share prices like we have in Naspers it’s hard sometimes to believe what’s behind it but clearly it’s soundly based.

MARTYN DAVIES: It’s a numbers game, increasingly becoming a value game through key companies like Tencent.