Naspers is by far the best-performing media company in South Africa, thanks in large part to its willingness to embrace technologies as they develop. Whether it’s satellite TV or the internet, Naspers is quick to spot the Next Big Thing, and to roll up its sleeves and get involved.
However, even for Naspers, things aren’t always perfect. In taking on a one-third stake in China’s Tencent, for example, Naspers really bet a chunk of its future on China. This isn’t a bad thing – the growth potential there is huge as China is still in the earliest days of its e-commerce and online revolutions. However, exposure to China is fraught with risk. The Chinese government intervenes heavily in the economy, and regulatory processes are by no means free and transparent. Just this last week, Tencent got caught in some government changes, and Naspers’ share price took a bug knock. Hopefully, the bet will pay off in the long-term, but right now, it’s introducing a little volatility into the usually stable Naspers. – FD
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ALEC HOGG: As Gugu’s just told us, Naspers shaved most of the points off the benchmark index yesterday and miners, ArcelorMittal SA, Exxaro Resources, and Impala Platinum also edged slightly lower today. To get a more in-depth look on these market movements, we’re joined by Matthew Warren who is Head of Financials and Retailers at Partner First Avenue. It’s good to have you here with us, Matthew.
MATTHEW WARREN: It’s good to be here.
ALEC HOGG: You have to dwell on this Naspers story. Now, I see it’s down six-and-a-quarter percent, so it really is taking a hit. It went up on Tencent. When Tencent in China gets a little cold, it looks like Naspers is getting pneumonia.
MATTHEW WARREN: Yes, it’s a bit of a volatile stock. However, if you look at what’s taking place in China, do they really want to have a ‘winner take all’ type of situation with banking transactional revenue? I think that’s the question they’re beginning to look at, because it can easily happening. They have a huge user base. If they offer banking products, they might well be taken up. On the other hand, you have the very large banking system there, which is also state-owned. Do you want those revenues from transactional banking leaking out of the state-owned banks and into a ‘winner take all’ type of situation? It would put a lot of pressure on the banks if that were to happen in a sizeable fashion.
GUGULETHU MFUPHI: Often, when we speak about Naspers Alec, you always mention the element of exponential growth and it does seem as though the banking sector in China doesn’t quite grasp that concept, in the same way that we don’t just yet – with regard to ecommerce.
MATTHEW WARREN: You’re seeing tremendous growth out of Naspers and really, this is a setback. It’s something they were hoping to do and they were hoping to do it at maybe a fast pace, but in this case, if the regulator pushes back they have so many different ways to monetise this platform of users. It’s one of the strongest and largest networks online in the world. For example, gaming: if you want to bring a game from offshore, you’ve successfully developed a game, and you want to bring it into China there’s really one viable way to do that in size, and that’s through Tencent. There are plenty of ways for them to win and I think that with time, they’ll monetise and they’re going to keep working at it, but maybe this is just a setback in one of those plans.
ALEC HOGG: There are – kind of – two issues here, aren’t there. Be careful about the Chinese authorities because they can kibosh any business plans you might have. On the other one, I was talking to a banker who said what keeps him awake at night is the likes of Tencent, because if they get it right – Tencent, WhatsApp, and even Mxit here in the South African context – if they get that right, financial services will change.
@alechogg yes #Naspers bet on #China is playing off big time. Tencent is giving Alibaba hell in mobile space.
— Ramon Thomas 高富帅 (@RamonThomas) March 18, 2014
MATTHEW WARREN: You can picture it, right. Some of the local banking players have said their biggest threat from the outside is someone like Facebook and Google etcetera. You can picture it. Look at Safaricom in Kenya: it kind of developed organically before the banking system took full route, but they dominate payments within Kenya. If you went to a market where the banks are dominating, a ‘winner take all’ came in and took away all that revenue share… It’s that revenue which helps in allowing them to lend at the terms they lend at, and if that revenue falls away, the risk appetite has to fall away at the same time. That’s where the government and the regulator might take a view on that. They might not want to see that happen at such a rapid clip.
GUGULETHU MFUPHI: The Naspers share price is loved by many in South Africa. Should they just ignore this little hiccup or watch it unfold?
MATTHEW WARREN: In our view, Tencent is in the realm of fair value. We still like Naspers here. As I was mentioning, how many places in the world can you have a network effect with hundreds of millions of users? You mentioned the regulators. The regulators have shut out the foreign competition for quite a while here. Even if they allowed them in now, it’s essentially too late to displace that network. If you look at advertising for example, advertising spend in the network is small at this stage, compared to Facebook. Granted, there’s more consumer discretionary income in Facebook’s user base, but isn’t that going to be growing inside of Tencent for the next several decades? When you look at those types of trends, you can picture a lot of growth and many good things happening – revenue and profit-wise – with Tencent.
ALEC HOGG: It gets back to that whole exponential growth story. Your colleague Hlelo wrote a piece on gold recently. Did you guys get any kickback from the gold sector, given that you’re so negative on it?
MATTHEW WARREN: Yes, if any of us are on TV and talking about it, the gold bug seems to pop up. There’s almost a religious fervour with some investors in gold, which I don’t quite understand. When we look at gold, we see something that’s un-investable, so I’ve yet to hear a rational case on what the fair value of gold is. I never have heard it and I don’t think I ever will hear it. You can’t peg a number on it. If you can’t peg a number on what gold is worth, what are you going to put in your valuation module for the revenue side? You can figure out volumes. You can figure out cost to some extent, but there’s no way to rationally make a case for what that revenue line should be, in our opinion.
ALEC HOGG: You guys also have lots of research into the mobile sector. We have Jubie Matlou coming in later, from ICASA. This whole fight that’s going on between MTN and Vodacom on the one hand and ICASA on the other: who do you think is going to win?
MATTHEW WARREN: I guess, as a cellphone consumer, I hope ICASA comes out on top here. In South Africa, you see some of the highest rates, some of the highest margins, and some of the highest profits in mobile telephony. Obviously, the regulator seems to want to change that situation and make it a bit more competitive. The incumbents – with a lot of money at stake – are taking that process to court. I think we’re at a critical time here, so the asymmetry that’s being introduced, if it goes through the court process, is going to give the likes of Cell C a major boost in terms of trying to gain market share and make a more competitive market. At the same time, you see the incumbents…Vodacom perhaps going after Neotel, and you see MTN on the other side trying to link up with Telkom mobile. You have to take a threat away…take the seriousness of that threat away, and also perhaps access some Spectrum in the process. This next while here, is critical to the future of the cost and price of telephony in South Africa.
ALEC HOGG: Would you hold MTN and Vodacom shares?
MATTHEW WARREN: We don’t own anything in that space. Really, its supersized profits that are under attack both from the market and Cell C, and with a bit of help from the regulator. That applies to Vodacom obviously, but with MTN, you see a similar pattern of events start to happen in Nigeria. You see interconnect rates coming down. You see some threats and pressure from the regulator there, which is a huge profit pool for MTN. Even though they’re more diversified, as we look forward we see a commoditisation over time – sooner or later – perhaps sooner, so as investors we don’t want to pay for current margins/current returns, when we think they’re going to be heading lower in the future.
GUGULETHU MFUPHI: Matthew, you also focus on the retail space in South Africa and one new entrant that will be listing on the JSE soon, is Choppies. Will there be a disruptor?
MATTHEW WARREN: They’ve done very well in the geographies they’ve played in and they’ve come across the border into parts of South Africa with some success. I don’t know them particularly well, but they are obviously bringing low cost to the market. However, I think coming into South Africa is going to be very difficult. You’re up against the likes of Shoprite now, who is really dominant in the continent and in that space. I think it will be a challenge but again, it’s good to see competition.
