Did you know that it’s possible for you to buy Tencent (TCEHY) shares for lower than its market price? In this article, we explore how that’s possible, and discuss one of the greatest venture capital investments ever.

1. Introduction

Naspers (NPSNY) was founded as Die Nasionale Pers (Afrikaans for “The National Press”) on May 12, 1915. Initially, it only published newspapers, but it soon expanded to books and other forms of media. Today, it operates through three segments: Television, Internet, and Print.

In 1985, Nasionale Pers, in conjunction with several other South African media companies, formed the pay-television service M-Net, which was listed in 1990 on the Johannes Securities Exchange (JSE). Nasionale Pers itself would become listed on the JSE in 1994, and in 1998 the name of the group was changed to Naspers.

2. The Greatest Bet Ever Made

At the turn of the century, Naspers continued its foray into the media space. In January of 2000, it merged its existing private education activities with that of another leading South African private education business to form Educor Holdings Limited, one of the leading private education providers in South Africa. During the same year, Naspers also re-organised and branded its print media business as its “Media24” division.

In 2001, Naspers made a bet on a small, obscure web company abroad. They acquired a 46.5% interest in the operator of an instant messaging platform in China. That’s right. A South African television operator purchased 46.5% of Tencent for just $32 million. With a return on investment of over 4000x, it is one of the greatest start-up investments in recorded human history.

3. Birth of a New Star

In late 2018, the company encountered new problems as they suffered from success. Their huge stake in Tencent had resulted their own company having an outsized weighting on the JSE, despite efforts to reduce these effects via a second listing.

Meanwhile, during this time, Europe found itself lacking internet technology companies capable of competing with U.S. and Chinese giants like Google (GOOGL), Facebook (FB), Alibaba (BABA), and Tencent. Out of the top 20 internet companies by value in 2018, none had headquarters in Europe.

The solution to both? The spinoff. In 2019, Naspers announced that it would be transferring all of its international assets, including its Tencent stake, to a new company, Prosus (PROSY), which was to be listed on the Amsterdam exchange. Its market capitalization on its first day of trading was roughly $100 billion, instantly making it one of the 10 biggest consumer internet groups in the world.

4. Bargain Tag

Despite the spinoffs and additional listings, both Naspers and Prosus continue to trade at discounts relative to their stake in Tencent. In July 2021, additional efforts were made to help reduce this gap via a share swap. At the time, Prosus had a market capitalization of about 138 billion EUR while its 28.9% Tencent stake was worth around 172 billion EUR.

In a deal that cost 144 million EUR in just fees alone, Prosus issued shares to purchase 45.4% of Naspers’ shares, in order to tighten the 35% (Naspers) and 20% (Prosus) discounts that the shares were trading at.  

This discount continues to remain, partly due to 75+% of Prosus’ NAV (net asset value) being derived from its Tencent stake (as of December 2021). In addition, both Prosus’ and especially Naspers’ dominance on their respective exchanges highly incentivizes portfolio managers to sell their shares in order to diversify.

As of February 2022, Tencent shares trade at around 424.00 HKD – giving a market cap of 4.04 trillion HKD, meaning Prosus’ 28.9% Tencent holdings are worth about $149.5 billion. Combined with their other assets (valued in December 2021), this brings their NAV to around $199.6 billion.

In contrast, Prosus’ 53.59 EUR share price means a market cap of around 136.6 billion EUR, roughly equal to $152.7 billion, which is a 23.5% discount compared to its net asset value. (Note – USD/HKD: 7.81, USD/EUR: 0.89.)