Prosus is trading at a steep discount on NAV (OTCMKTS:PROSY)
Prosus (OTCPK:PROSY) is a holding company whose main asset is a significant stake in Chinese tech giant Tencent (OTCPK:TCEHY).
Its parent, South African-based Naspers (OTCPK:NPSNY), bought about a third of the Chinese startup at the time for about $30 million more than twenty years ago, making one of the most profitable investments of all time. Over time, Naspers sold some of its stake, but still owns around 30% of Tencent’s total shares. As a result, Naspers’ market capitalization has reached a level not seen on the Johannesburg Stock Exchange, which is actually quite illiquid.
This led management a few years ago to sell most of Naspers’ assets to a company whose shares were then listed abroad (on the Dutch stock exchange): Prosus.
This company was still owned by the South African parent company, which held a significant 73% stake (see photo below).
A complicated story
Last year, the management of the company (the two firms share the same board of directors) decided to issue more Prosus shares and “buy back” those of Naspers. This could have reduced the free float of Naspers and increased the number of listed shares of Prosus (on the more liquid Amsterdam Stock Exchange). Unfortunately, the ownership structure became something of a mess after the deal, with Naspers holding a large stake in Prosus and, conversely, Prosus holding a large stake in Naspers. Ultimately, Naspers still owns around 42% of Prosus and continues to control the company through certain special rights.
The complexity of the shareholder structure does not help shareholders to value the two companies rationally: the NAV of Prosus, for example, is much higher than its market capitalization.
Now those numbers should be updated, because a lot of things (and prices) have changed since the start of the year. The following is probably a more accurate estimate of Prosus’ discount to its net asset value (courtesy Anchor capital):
It is true that just under 80% of the total value of Prosus NAV is made up of Tencent’s stake, which could be considered risky for many reasons: I myself am not a fan of Chinese companies, mainly because of problems with the complex LIFE Structure through which they are usually referenced. To be fair, many big investors like Ray Dalio, Monish Pabrai (who recently invested in Prosus) or Charlie Munger don’t share my opinion. To be fair, despite the immense wisdom of these investment gurus, their valuations haven’t turned out to be correct as Chinese stocks continue to struggle and Tencent is no exception.
Regardless of your position on Chinese stocks, the gap between Tencent’s current market value and Prosus’ stock price is still there. Moreover, one could easily argue that now might be a good time to buy quality Chinese stocks as their prices are very low. Yet, it is important to keep in mind that Prosus is not just Tencent and that company has already clearly shown that it is capable of discovering early raw gems capable of multiplying the initial investment by a hundred times over a period of time. of years. There are already strong candidates in the Prosus portfolio for this outperformance, so to speak.
Overall, investing in this heavily discounted stock may make sense if you’re looking at the long term, mainly because:
1. Tencent might be a bargain after all, and buying Prosus would buy Tencent at a big discount.
2. Even if Tencent ends up being worth nothing, Prosus is only worth a little more than the rest of its holdings (excluding Tencent) at current prices.
The latter is even more true if we consider the parent company of Prosus: Naspers.
An alternate option
There is indeed a more conservative way to take advantage of the steep Prosus/Naspers discount without buying the shares directly. The South African stock market is indeed highly concentrated and Naspers is still the largest company by capitalization. This means that if you consider a South African equity fund like the iShares MSCI South Africa ETF (NYSEARCA:EZA), Naspers will end up retaining a large share of the basket (currently around 9%).
Prior to the aforementioned buyback of Naspers shares, this holding represented more than 20% of this ETF’s assets, and this percentage would certainly have been a better fit for the strategy. However, the lower percentage of Naspers shares will allow fund managers to increase their stake in the company, so the share price may rise over time. It should also be noted that EZA’s exposure to Naspers has been gradually reduced over the past year, which is a direct consequence of the share price decline: Naspers (and Prosus) have seen more 45% of their capitalization hit the ground in the last 12 months. That’s the downside of investing in an index: your exposure to a company goes down when its stock price goes down (and vice versa), but that’s part of the equation. On the other hand, if you buy the South African index instead of Prosus, you can stake more money on almost the same bet because your inherent risk objectively decreases.
In addition, this ETF offers exposure (approximately one-third) to a number of South African banks whose overall operating metrics are better than the average in Europe or the Americas. Also interesting is the exposure to the commodities/energy sector (around 30%), which should perform well in an inflation scenario: and the fund’s key parameters are certainly more favorable than those of most European or American indices.
However, EZA’s fee of 0.57% per annum does not necessarily make it one of the cheapest ETFs.
In a market that is getting riskier by the day, Prosus could be a solid investment given the extreme discount it is currently trading at to NAV. The main long-term risk (but also the biggest opportunity) is that the South African holding company will be overexposed to Tencent, which in turn poses a number of geopolitical and regulatory risks.
An interesting alternative could be to gain exposure to Naspers (the parent company of Prosus) by buying the South African stock market index: EZA, which currently allocates just under 10% of its cash to Naspers. Given that the South African stock market is full of mining companies and banks, EZA could also provide additional hedging against creeping inflationary pressures.