Prosus announced that they are going to start selling Tencent shares to fund a buyback of Prosus and Naspers stock. They said they will continue this while the discount remains unacceptable. About a month ago, Prosus was selling at a 48% discount to just their Tencent shares. And now, after Prosus has increased 35% and Tencent has fallen 3%, the discount to just the Tencent shares is 26%. After running the numbers, as a Prosus owner, I like this move.
Initially I did not understand this decision. When I hear “selling Tencent” in the summer of 2022 when Chinese stocks are depressed and the interest in investing in China is low, I get concerned. But after thinking it through, this is the right move. As Prosus points out on page 5 of their presentation, this buyback will increase Prosus owners’ interest in Tencent. Selling Tencent to buyback Prosus and Naspers will increase the NAV per share for Prosus shareholders and also the exposure to Tencent per share for Prosus shareholders.
It is not intuitive, but it is correct. The Tencent sales and Prosus buybacks mean more Tencent exposure for Prosus shareholders. This is accurate as long as the discount to Tencent is in place for the Prosus shares. Prosus’ market cap is $96 billion, their Tencent shares are worth $129 billion, as long as the Tencent shares inside of Prosus are available at a discount, then selling Tencent to buyback Prosus shares will lead to remaining Prosus shareholders owning more Tencent per share.
Some people are wishing Prosus would sell other assets to fund the buyback, but Prosus said they are willing to buy back up to 50% of the shares in issue, and to do this at today’s prices would take $48 billion. No other public companies on their balance sheet come close to this value, and while their non-listed assets are quoted at $31 billion on their NAV page, selling them in a quick and public way probably is not feasible, nor is it their desire (they want to continue growing those businesses).
In my view, selling Tencent shares to fund buybacks makes sense as long as Tencent is available inside of Prosus at a discount. Once Prosus’ market cap reaches the value of their Tencent shares, I hope they stop selling Tencent shares. As an owner of Prosus, I don’t want them lowering the value of my Tencent stock per Prosus share in order to raise the value of their non-Tencent assets per Prosus share. Let that happen organically with growth in those ecommerce businesses. But when it comes to Tencent, don’t sell Tencent shares unless Tencent shares are avaiable inside of Prosus at a discount, and today they are. I will be monitoring the sales of Tencent shares and the market cap of Prosus versus the value of their remaining Tencent shares, and if they continue to sell Tencent in anything but a minor way once that discount has closed, I will be inclined to think about selling.
My investment in Prosus is primarily a way to own Tencent shares, and I was able to do this at a discount. The story remains the same for me. My exposure to Tencent is going up, and management is saying they believe in Tencent’s long-term potential. I believe this program will not continue indefinitely, as management is saying that the “Program will continue while the discount persists at elevated levels.” I read that to mean that once the discount closes to a reasonable level they will stop selling Tencent shares.
In other Prosus news, their ecommerce (non-Tencent) revenue was up 51% year over year, and their major business segments are “profitable at the core.” Their ecommerce investments are long-term plays that take time and investment to play out, but I like what I’m seeing. Lots of interesting things are going on with classifieds and food delivery and there is lots of growth. However, these businesses are not the primary reason that I own Prosus. I own Prosus for the Tencent shares and for the way I was able to buy the Tencent shares at a discount. And because I bought Prosus for less than the Tencent shares are worth, I was able to get the ecommerces businesses for free. I am interested in the success of these ecommerce investments, I am watching the situation closely, but my primary focus is Tencent.
Prosus is the best of both worlds and matches my value investing style. Prosus is a discount to NAV play that is going to evolve into a growing pie play. I was able to buy a wonderful business, Tencent, at a discount, I got the ecommerce businesses for free, and long-term, as the discount closes, this will turn into a growing pie wonderful business investment as I remain a long-term owner of Tencent and continue to hold it as long as the wonderful business holding checklist checks out.
I am excited by management’s decision, and I think it as a masterstroke. As long as they don’t decrease the value of Tencent per share in anything more than a small, predictable , and clearly communicated way, then I’m a happy camper. If the discount widens, I will have the opportunity to buy more. And if the discount closes, I’ll move into wonderful business owner mode and sit back and watch Tencent compound and grow.