In mid-September Tencent announced it had secured its first video gaming licence in 15 months. You might not have heard about it. Defence of Health is a tame “new China” affair, which seems to have excited investors about as much as it did management.
It’s a health-related educational game and as much unlike Tencent’s earlier money-spinning hit Honor of Kings as could be imagined.
Honor of Kings was all about killing opponents to gain abilities and gold. Defence of Health is focused entirely on learning all about the human body and how to prevent viruses invading it.
Tencent CEO Pony Ma is, unlike his namesake Jack Ma, nothing if not politically astute. But it’s unlikely anything he does could rescue Tencent from the inevitable consequences of the dramatic political changes that have played out in China over the past two years and more.
Xi Jinping, general secretary of the Chinese Communist Party, evidently doesn’t like video games, particularly money-spinning addictive ones. In China minors have been banned from playing them for more than three hours a week. Xi generally doesn’t like consumer-orientated tech goodies. As he sees it, technology should focus on tackling broader social issues and developing the economy.
That is not good news for Tencent, which is why the share price is almost one-quarter of the record high it reached in January 2021.
And as long as Xi remains in power Tencent shareholders should expect little improvement, apart from occasional upticks.
This means Naspers and Prosus shareholders can also not look forward to recovering the hundreds of billions of rands of value lost over the past two years. The grim reality is that despite all the management time and shareholder funds pumped into building a portfolio of assets to counter the huge influence of the 28.9% stake in Tencent, Naspers and Prosus continue to exist in the shadow of the Chinese technology company.
For the Prosus/Naspers shareholders it may, or may not, be some comfort to know that management will also be taking some pain, though not as much as the shareholders. And it’s not as though they’ll actually be losing money, they just won’t be getting as much as they might have.
There’s not too much sympathy for them among investors. “Van Dijk and his team grew that discount and it was largely because of the inappropriately structured remuneration packages, which were offensively large,” one irritated fund manager tells the FM.
The difficulty for CEO Bob van Dijk and his fellow executives is that it looks as though this year they’re going to get caught between changes in the group’s remuneration structure and the dramatic fall-off in the share price.
The changes are part of the board’s ongoing efforts to reduce the yawning discount between the value of the Tencent stake and the Prosus share price. “For FY23, we are materially increasing the CEO’s and CFO’s short-term variable compensation exposure to the reduction of the discount,” says remuneration committee chair Craig Enenstein in his 2022 remuneration report.
A special incentive has been designed, focused exclusively on reduction of the discount. “At the same time we have reduced the balance of annual compensation in order to emphasise the importance of this discount-centric incentive and align remuneration with shareholder performance,” says Enenstein.
And not only is the annual pay being reduced but, adds Enenstein, the committee has decided not to award long-term incentives for the financial 2023 year.
And only is the annual pay being reduced but, adds Enenstein, the committee has decided not to award long-term incentives for the financial 2023 year.
By end-October there was little sign of progress with the discount-reducing campaign. The net asset value per Prosus share, determined by a group of contributing analysts and disclosed on the Prosus website, was R1,334.20 against a share price of R793. So, a discount of just over 40%. Surely not good enough to justify payment of a special incentive?
The heaviest remuneration hit will be to the value of the various Naspers and Prosus share-based awards issued to Van Dijk since 2016.
There are three categories of share-based awards (nothing is ever simple in Naspers/Prosus): performance share units, share appreciation rights and share options. That’s not all, there are also share appreciation rights linked to the Naspers Global Ecommerce share, which includes a calculation of the group’s unlisted investments.
According to the 2022 remuneration report, the potential gains of awards that vested during financial 2022 was $24.4m. In addition, the fair value of all Van Dijk’s unvested awards was $30m.
It is impossible to know what value there is in the Global Ecommerce share appreciation rights. However, at the current share price (R1,895.98) none of the Naspers share options has any value. They were allocated at strike prices between R2,000 and R3,494 and come with performance conditions requiring four-year share price growth.
The Prosus share options are in the money because they were issued at just R71.61 but they also come with a four-year share price performance metric.
This appears to leave Van Dijk with just 100,625 Naspers performance share units and 26,993 Prosus performance share units (PSU), which at the end of June had a value of $13m and $1.5m respectively. However, though these PSUs were granted at no cost, they come with performance conditions linked to total shareholder return.
There are still four months to the end of the financial year. Anything could happen, but it likely won’t be anything good.
Although the prospect, vehemently denied by Prosus, of a sale of the Tencent stake does provide scope for an extremely generous payout to the executives, the sort of payout that traditionally comes with such a ‘restructuring’.
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