Description

Overview

Naspers is a media holding company based in South Africa. For a description of its primary businesses, please see blaueskobalt’s writeup from 9/5/17.

Whereas that prior writeup suggested an outright buy of Naspers, we believe going long Naspers and hedging out the company’s ownership of Tencent presents a more attractive value proposition. By buying Naspers stock and shorting your effective pro-rata ownership of Tencent stock, you create a Naspers stub that quite simply is priced wholly irrationally. At current prices, the market is paying you about $56b USD to own all of the ex-Tencent assets. We believe this is an unsustainable dynamic and provides an enormous margin of safety.

Stub Math

For purposes of simplicity, we will present everything in USD on a per share basis:

First, the NPN stub is being valued at negative $131/sh. That is, the Tencent stake alone that NPN owns is significantly more valuable than NPN’s own valuation:

Second, the NPN stub itself is very valuable. We conservatively estimate value of $38 per share. This includes market values for the other public companies, a conservative multiple on the cash cow South African video business, and no value for all the other non-ecommerce businesses, including the potentially quite valuable Sub-Saharan Africa video business.

For the private e-commerce portfolio (Flipkart, OLX, Avito, etc), we value it mostly at cost, with the exception of some prominent holdings that have recently raised capital with valuations known publicly. We suspect the e-commerce portfolio is actually worth far more than the $20/sh shown in the following table.

So, to summarize: the market is paying you $131/sh to own assets worth at least $38/sh.

The Trade

For every Naspers share you buy, you need to short approximately 7.3 shares of Tencent. Note that Tencent trades in Hong Kong, while Naspers trades in South Africa; you may want to consider your FX exposure.

Catalysts

What are the catalysts? This is the billion dollar question (literally in this case).

First, we are comfortable with this position even in the absence of hard catalysts because we think the size of the discount is too astronomical to ignore. Put simply, we just don’t think the market can continue to pay us this much to own the Naspers stub into perpetuity. That being said, we would point to the following potential catalysts:

1.    For the first time in probably ever, there is evidence of meaningful shareholder unrest regarding the discount (for instance: https://www.economist.com/news/business/21727949-shareholders-africas-most-valuable-firm-attack-bosses-pay-naspers-comes-under-fire). Although the Board effectively controls the company via its dual share class, there has been a noticeable change in tone from management. Read the transcript from the 4Q analyst day (the first such one Naspers has held in many years). There was a lot of proactive discussion from management about closing the discount, and multiple shareholder questions about such. The tide may be beginning to turn.

2.    There is potential for a dual listing or tracking stock on the Hong Kong exchange. The Hong Kong Exchange is potentially changing its rules early this year to allow for stocks with dual share classes to list there (https://www.reuters.com/article/us-hkex-regulation/hong-kong-to-push-ahead-with-controversial-dual-class-shares-idUSKBN1E90UR). If management were to list a Tencent tracking stock, it would force the market to ascribe value to the stub.

3.    Management has been improving disclosure of its ecommerce portfolio and is diligently working to bring these businesses to profitability. There was noticeable progress of such in 2H17. Further clarity on the value embedded in this portfolio will only shine more light on the discount at which you can create the stub today.

4.    Notably, this negative stub valuation has NOT existed forever. Except for the last two years, the market has always (rightly) ascribed a positive value to the stub.

Risks

1.    This dynamic can go on for a while, and the discount can widen even further. Something that is priced at a crazy level can be priced at a 2x crazy level.

2.    There could be some tax and/or frictional costs to ultimately unwinding the Tencent (or other) stakes. Although management has repeatedly stressed that they hold these investments in SPVs designed to negate taxable events (for instance, their sale of Ibibo last year did not trigger any tax payments), the South African government could always try to claw back some tax revenue in one way or another (or should the company dividend out any proceeds, shareholders could be subject to withholding tax).

The way we think about these risks is that while they are real and legitimate possibilities, the discount is so enormous and irrational today that we are being compensated for them. We think that the market is currently offering a unique opportunity to create this position with a huge margin safety and meaningful upside, more than fully discounting these risks.

Catalyst

See catalyst discussion above