Forbes
By Steve Schaefer
7/06/2015 @ 12:52PM
Yahoo Isn't The Only Stock You Can Buy For Almost Nothing Thanks To China's Internet Boom
It has been well-documented that investors in Yahoo YHOO -1.93% are getting the Internet company’s core business for basically nothing thanks to its stakes in Alibaba (and to a lesser extent Yahoo Japan ), but there’s another company with a sizable stake in a Chinese Internet business that trades just as cheaply and might offer a more compelling growth story.
Naspers is a South African conglomerate with assets that range from e-commerce to pay-television and print media. It has a $66 billion market cap and goes for a seemingly expensive 41 times forward earnings. However, Naspers also owns a 33.6% stake in Hong-Kong listed Tencent Holdings that is worth $63.6 billion on its own. Throw in the $2.7 billion in cash on the company’s balance sheet and its stock is basically a free call option on the underlying Naspers businesses.
Trades like this are uncommon, and over time value investors expect such valuation incongruities to work themselves out. But the operative term is “over time.” FPA’s Crescent Fund invested in a Naspers “stub” in the third quarter of 2014, buying a bit more than three million shares of the South African company and shorting a proportionate number of Tencent shares.
At the Morningstar Investment Conference in Chicago in late June, FPA Crescent’s Steven Romick explained the rationale for the trade. Naspers has other e-commerce assets, is a leader in online advertising and has terrific pay-TV assets in Africa “throwing off cash,” he said, explaining that the valuation of Tencent “stands in stark contrast to the value of [Naspers].”
In a letter to clients last fall, Romick wrote that thanks to the favorable valuations, the $20 billion Crescent Fund was essentially being paid to own the cash flows coming from Naspers’ television and media assets, as well as a portfolio of e-commerce investments, all thanks to stake in Tencent.
“When the price is right, even absolute value investors like us can feel like emerging market venture capitalists,” Romick wrote.
The two stocks have tracked closely since last fall, not terribly surprising given that Tencent’s value accounts for virtually the entire market value of Naspers:
In a note to clients July 5, Morgan Stanley analysts took a dive into the Naspers/Tencent valuation riddle and suggested it’s a better-looking version of the Yahoo/Alibaba trade. (See “Betting On Yahoo Beyond The Alibaba Trade.”)
A key difference, the analysts argued, is that Naspers has owned its Tencent stake for 14 years and has shown no inclination to change that arrangement, which means the value of the position may remain locked within the company for years to come.
For Naspers, the lucrative Tencent stake provides “financial oxygen” to invest heavily in its core business, which has exposure to emerging markets that are expected to grow faster than the U.S., Europe and Japan, where core Yahoo’s strength is largely consolidated.
Both Yahoo and Naspers “will always be technically undervalued on sum of the parts/break-up metrics,” Morgan Stanley argues. “This is normal for conglomerates, holding companies, or often Internet companies with large cash balances.”
Given its overweight ratings on Alibaba and Tencent, Morgan Stanley thinks the planned tax-free spinoff of Yahoo’s shares in the former — which still could be subject to a challenge from the IRS — might provide some upside for Naspers if it illustrates a successful effort for a conglomerate to unlock the value of a major Chinese Internet asset.
“Yahoo will either be viewed as a guide for value creation or cement a 20-30% discount, typical for complex conglomerates with unclear catalysts, like Softbank ,” the analysts wrote. noting that Naspers CEO Bob Van Dijk has a portion of his compensation tied to creating value at the core business, upping his motivation to improve the company’s worth beyond any further appreciation in the Tencent holdings.
That underlying value is where the Yahoo/Naspers comparison unwinds a bit, considering that core Yahoo is barely growing but generating profits. Core Naspers, on the other hand, has intriguing growth potential with a focus on regions like Latin America, Asia and Africa, but is currently unprofitable.
“Naspers has greater ambition and its core has more long-term optionality,” the Morgan Stanley analysts wrote.
The investment ramp-up afforded by its stake in Tencent allows Naspers to invest much more aggressively than a company with its fundamentals would otherwise, especially in fast-growing, and hopefully profitable, areas like online classified ads in Brazil and India. That’s also a reason why monetizing the stake isn’t particularly appealing at present.
There is also the risk that China’s Internet boom goes bust, taking the likes of Tencent and Alibaba south along with the scores of other companies that have ridden its waves to fresh heights. While the Tencent position is by far the biggest driver of Naspers’ value at present, it’s also worth noting it has stakes in a trio of other companies that could become significant enough to add material value: Russian Internet portal Mail.ru and classifieds site Avito, and Indian e-commerce company Flipkart.
Shares of Naspers are up 20% this year, while Tencent has gained 30%. Yahoo is down nearly 24% in 2015, to a 23% decline for Alibaba.
