As a keen market observer following the trajectories of Naspers, Tencent and Prosus over the past two decades, we are witnessing yet another remarkable shift in the investment landscape, which continues to favour US technology behemoths over less favoured emerging market peers. One of the most significant recent developments has been the meteoric rise of Nvidia, a company now at the forefront of driving investment markets and one of the most valuable companies in the world. 


This rise has not only reshaped the technology sector but also holds investment implications for companies like Tencent, and by extension, Naspers and Prosus.


Nvidia, known for its pioneering advancements in graphics processing units (GPUs), has emerged as a key player in the artificial intelligence (AI) and data processing industries. The company's GPUs are essential for AI workloads, making Nvidia indispensable in a world increasingly driven by AI applications. This surge has propelled Nvidia’s market value, influencing broader investment trends as investors seek exposure to companies linked to AI and high-performance computing.


For Tencent, a technology conglomerate with a diverse portfolio ranging across gaming, social media, fintech and cloud services – the rise of Nvidia presents a curious dynamic for investors. As one of the most innovative and dominant tech businesses, should Tencent be trading on a PE multiple of around 15x when Nvidia is afforded a multiple of 37x? Nvidia bulls would argue that such a premium may be justified given its superior growth outlook, while bears may fear that growth forecasts are overly exuberant, risking significant capital loss if the realised growth disappoints.


With efficiencies from AI, Tencent’s portfolio of businesses could receive a significant boost, both from a revenue and cost perspective. An example of this is increased productivity from gaming where AI innovation may significantly reduce reliance on developers, generating cost savings and accelerating speed to market.  

 

Source: Bloomberg

Comparing the performance of Nvidia and Tencent for the period January 2022 to October 2024. Should Tencent be trading on a PE multiple of around 15x when Nvidia is afforded a multiple of around 37x?

 

Naspers, a South African multinational holding company, holds a 24.3% stake in Tencent through its subsidiary Prosus. This strategic investment has long been a cornerstone of Naspers' portfolio and a catalyst for turning Naspers into one the most valuable companies on the JSE. As Nvidia's ascent drives interest in AI and gaming sectors, Tencent’s gains are expected to positively impact Naspers and Prosus, boosting their valuations and investor appeal.


One of the most compelling developments for Tencent has been its commitment to a substantial share buy-back programme, with $12.8bn earmarked for investment in 2024, which we believe may be repeated in 2025, given strong Tencent free cash flow generation. This move is not only a signal of confidence in its long-term growth prospects but also a strategic effort to enhance shareholder value. The buy-back programme, financed by Tencent’s robust cash flow, will reduce the number of outstanding shares, thereby increasing earnings per share and providing a buffer against market volatility. 


For Naspers and Prosus, this buy-back is particularly beneficial. Given their substantial holding in Tencent, any appreciation in Tencent’s share price directly augments their net asset value. Further to this, Prosus is actively selling its Tencent stake to fund a buy-back of its own shares at a 35% discount, enhancing its net asset value per share. 


However, despite these positive developments, there remains two significant concerns that dampen the full realisation of these benefits: China’s relationship with the US and China’s regulatory environment. 


Over the past few years, rising tensions between the US and China has seen US regulators clamping down on the sale of chips to China. Lack of access to the latest in processing chips has led to questions about the extent of the technology gap between US leaders and their Chinese counterparts. While there have been some views that China may be several years behind their US counterparts, this seems unlikely and if Chinese tech giants have closed this gap, growth may surprise positively and discounts may not be justified. There’s also a view that China’s own AI language models are superior to those developed by their global peers, a factor which could provide a step change in levels of innovation. 


In 2020, Chinese authorities intensified their scrutiny of the tech sector imposing regulations that at times, seemed unpredictable and stringent. As recently as December 2023, Tencent lost $54bn in market capitalisation in a single day of trade with Naspers and Prosus both reporting double digit percentage losses.  
This regulatory landscape has led to a persistent discount on Chinese tech shares compared to their US counterparts. Investors remain wary of potential government interventions, which could impact operational potential and profitability negatively.


Tencent has not been immune to these regulatory pressures. The Chinese government’s focus on data security, anti-monopoly measures, and other compliance issues has created a challenging environment for growth. While Tencent has navigated these waters adeptly, the overarching uncertainty continues to weigh on its rating and thus its relative stock performance. This discount in valuation is evident when comparing Tencent to similar US-based companies, which enjoy higher multiples due to a more predictable regulatory environment.

For Naspers and Prosus, this situation presents a paradox. On one hand, the undervaluation of Tencent due to regulatory fears offers a potential upside as these concerns abate and growth accelerates. On the other, this discount may persist and investors will enjoy superior returns in more established markets which are accorded a premium.  

Another question mark is around Prosus’ future capital allocation of its substantial cash pile, given weak historic returns on its e-commerce investment portfolio. When Tencent was driving Prosus to new highs, investor scrutiny of capital allocation was less critical. The tech bear market of 2022 quickly sharpened criticism of past investment decisions as both public and private markets for consumer tech businesses plummeted, negatively impacting Prosus’ e-commerce investment portfolio. Fabricio Bloisi’s appointment as Prosus’ CEO could prove well-timed, given significant existing investments in food delivery. Bloisi is highly regarded as a smart operator and has grown iFood into one of the most innovative food delivery businesses in the world. If Bloisi can balance unlocking value through driving profitability in the ecommerce portfolio and managing capital deployment to enhance returns, while further narrowing the discount Prosus and Naspers trade to their net asset value, investors may reap strong investment returns.

While Nvidia has captured the imagination of investors across the globe, Tencent appears to offer compelling value, which coupled with aggressive share buy-back programmes, should lead to strong valuation support for Naspers and Prosus, with further upside catalysts provided by Tencent growth acceleration and disciplined capital deployment by a rejuvenated Prosus management team

Disclaimer

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