Remarkably, given that it is the single largest shareholder in China’s most valuable company, Naspers has never been given a mention in the media of that country. Until, that is, the day after it offloaded 190m Tencent shares.
"Tencent drops 4% on Naspers’s stake-cut plan", shouted the headline in the business section of China Daily. For many among the former Naspers board it may have been a chilling confirmation of why they were right to fight to prolong undisputed control over the company; why for so long they treated the N-shareholders as hangers-on with few rights.
For much of the past 15 years it has been important for the Chinese that Naspers did not exhibit all the characteristics of a listed entity; that the executive team and controlling shareholders behind the Tencent acquisition were not susceptible to the normal cut-and-thrust of listed life and that they were not likely to be booted out in a hostile shareholder battle such as that threatened by Jannie Mouton in 2006.
The sale of 190m Tencent shares signalled a change and must have caused a frisson of anxiety among the Chinese partners who had taken an unchanging Naspers for granted. The sale of the shares suggests that for the first time since it listed in 1994 Naspers is paying some attention to its N-shareholders.
Last year’s corporate governance blunders and a new CEO have given the N-shareholders the opportunity to exert some, albeit extremely limited, authority.
The China Daily headline told the story of precisely why there had been so much opposition to this. As China saw it, the move led to short-term uncertainty, which was accompanied by share price weakness.
And as it turned out, given the share price moves since the sale, it may be that the old guard should have been allowed to continue to ignore the concerns of N-shareholders. It’s possibly just bad timing, but for many readers of China Daily the sale looks as if it could have been triggered by weakness in the Tencent share price and that it reinforced that weakness.
Furthermore, if the Naspers board believes the sale puts an end to shareholder demands, at least for the three-year period it has imposed, it is in for a rude awakening.
Albert Saporta, a director of Geneva-based investment advisory firm AIM&R, who has been an outspoken critic of Naspers’s handling of the discount, welcomed the sale, describing it as a "small step" in the right direction.
"It would have been better had they distributed the cash to investors as a special dividend or a share buyback and committed to sell down the stake regularly until the discount shrinks substantially," he says.
Saporta, who has called for Naspers to spin off the Tencent stake to Naspers shareholders, believes there will be more share sales before the self-imposed three-year deadline is reached. "My view is once you start the process, it will not stop until the discount has shrunk and investors are pleased, so I think more is to come," Saporta tells the Financial Mail, perhaps confirming Chinese concerns about a new era of uncertainty.
The N-shareholders are right to exert some influence, but moving too aggressively could spark retaliation from their Chinese partners. Apart from this uncertainty there is much good news on the Tencent horizon. Not least is that despite new numbers of users reaching a plateau, the existing users are spending more time on their smartphones using one of the seemingly unlimited array of Tencent apps.
And, importantly for those who are rightly concerned about the status of the variable interest entity (VIE) used by Hong Kong-listed Tencent to get around Chinese government restrictions on foreign investment, the Chinese government has been making encouraging statements about foreign investors.
"China to the world: we’re open for business", was the headline to a report by analysts Ren Xiaojin and Jing Shuiyu summing up discussions at the recent National People’s Congress. Addressing journalists after the congress, Premier Li Keqiang called for a greater inflow of foreign capital to help foster the development of world-class competitive companies.
The apparently warmer attitude to international investors may be influenced by trade tensions with the US. Challenging the legal status of VIEs would endorse US president Donald Trump’s criticisms of China’s protectionist attitude, which is something China would be keen to avoid as it presents itself as the victim of Trump’s volatile presidential style.
Another issue Tencent shareholders should be thinking about is the likely short-and long-term effect of China’s Social Credit System, which is in pilot phase and due to be rolled out across the country in 2020. Depending on your perspective, the system is either a Confucius-inspired way to encourage citizens to behave well or a dystopian, Orwellian-type nightmare. The formal objective of the system is to "raise the awareness of integrity and the level of trustworthiness of Chinese society".
Every citizen will have a baseline 100 points and can earn additional points by "good acts" such as engaging in charity work, donating blood or separating and recycling rubbish. Points are deducted for not showing up at a restaurant without cancelling the booking, jaywalking, cheating in online games and leaving false product reviews on Internet sites.
The rewards for good behaviour include free gym facilities, cheaper public transport and shorter wait times at hospitals. Those with low scores face restrictions on travel and on access to public service.
Apolitical systems of ranking and influencing consumers’ behaviour are common not only in China but across the world; most loyalty cards attempt to influence our behaviour.
But in China it is almost inevitable that the Social Credit System will become pervasive and will be used to push the government’s agenda and clamp down on dissent. It is also inevitable that the huge amounts of data collected by Tencent and Alibaba will play a critical role in implementing the Social Credit System, which has been described by many as "Big Data meets Big Brother".
The implicit closer ties to government may help to protect and grow Tencent and Alibaba’s business but could cause concerns among international investors.
And so, as always, the enticing and potentially enormous returns from China do have some nerve-racking strings attached.
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