Prosus/Tencent: reducing stake further would close valuation gap

Prosus has decided you can have too much of a good thing. The Dutch ecommerce group plans to sell part of its $134bn stake in Chinese internet company Tencent in order to buy back its own shares. The sale revokes an earlier pledge to hold on to the stake.

Prosus is controlled by Naspers, South Africa’s answer to Japanese tech conglomerate SoftBank. Naspers garnered an early mover reputation in Chinese tech, buying a large stake in Tencent nearly two decades ago for just $32mn.

One unfortunate effect of Tencent’s success since then is Prosus’s steep — over 50 per cent — discount to net asset value. Before Monday’s rally, its stake in Tencent exceeded the market value of Prosus itself.

Given this, raising funds for a buyback makes sense. Prosus reported a decline in core headline earnings of a fifth in the year to March on Monday. Markets have cheered the repurchase news. Prosus shares jumped 15 per cent and Naspers 20 per cent. Prosus has also sold almost $4bn worth of stock in JD.com, which it has received as dividends from Tencent.

But the timing could have been better. There were plenty of missed opportunities to sell Tencent at higher prices last year. Shares of Tencent have halved from their peak as China’s largest social media company was subject to local regulatory scrutiny.

This scrutiny continues. China’s gaming regulator has granted publishing licences to 60 games. Conspicuously missing were approvals for Tencent. Reassuring messages given to investors should be ignored. At 26 times forward earnings, Tencent shares remain at a 90 per cent premium to global social media groups such as Meta.

Prosus’s portfolio exposure to Tencent is high, at about three-quarters of net asset value as of the end of March. Even after the plunge in Tencent shares, investors have better choices available. Prosus should keep on reducing its heavy exposure.