What a great start Naspers/Prosus has had to 2023 — after a fairly torrid two years, the share prices of both counters are now heading back towards the record highs reached in March 2021.
Naspers is up 20% in the first three weeks of the new year and is now within easy reach of the R3,700 it touched that March. All it needs is for the perceived approach of the Chinese Communist Party (CCP) to remain tentatively supportive, or perhaps just apparently stable.
That doesn’t seem like much to ask for, but neither has been in evidence since the tumultuous events kicked off by Alibaba’s Jack Ma’s aggressive attack on the Chinese government back in November 2020.
Like some chronically jilted lover, investors in Chinese equities tend to go a little overboard at any sign that the CCP doesn’t hate them. The most recent indication was an unconfirmed report by the UK’s Financial Times that the Chinese government was discussing ways to take a “golden share” in Tencent.
Speculation of such government interference in South Africa might have led to a market meltdown, but for China investors it was interpreted as an indication that the CCP has called a truce in its two-year battle with the country’s powerful tech sector. It was reason enough for shares in Tencent to surge; Naspers/Prosus were dragged up behind it.
Like some chronically jilted lover, investors in Chinese equities tend to go a little overboard at any signs indicating that the CCP doesn’t hate them
The Chinese government’s recent acquisition of a 1% stake in an Alibaba division coincided with the news that group founder Ma had relinquished control of Ant Group, an affiliate of Alibaba, and is now essentially out of the Alibaba picture. Ma’s voting rights in the fintech group have been reduced from over 50% to just 6.2%.
The two developments might mark the end of hostilities between Alibaba/Ant and the Chinese government, which were triggered by Ma’s provocative and ill-considered remarks at a high-profile business function. The fallout was not limited to Alibaba/Ant but spread across the Chinese tech sector as the government moved to tighten its control.
For Tencent it resulted in a hefty 67% slump in the share price in the 18 months to end-October 2022. In August the group reported its first quarterly decline in revenue thanks to government restrictions, including a clampdown on gaming licences and tough Covid lockdowns.
According to the FT report the stake in Tencent has not yet been acquired by the government but it is expected to involve a 1% holding in one of the group’s main operating subsidiaries, and will come with special rights such as a board seat and the right to review content generated by Tencent.
The latest development follows news in late December that Chinese regulators had granted new licences for games made by Tencent. Apart from a licence for a free educational game received in September and a licence for a sports game in November, this was the first positive move by Beijing in 18 months.
Then came other moves suggesting President Xi Jinping was not going to be the anti-business hardliner that had been feared in the run-up to the CCP’s congress in October. Within weeks of asserting undisputed control over the party, Xi had not only relaxed controls over the property and tech sectors but lifted his previously rigid zero-Covid policy.
What is remarkable about the golden share purchase is that the Chinese government believes it is necessary to actually buy shares in order to exert control over China-based companies. Not only has it been a long-standing requirement for companies to host CCP committees in their midst, there is also the infamous variable interest entity (VIE) structure, which provides the government with the ability to upend foreign shareholders just for being foreign.
Steven Kuo, former lecturer at the Shanghai International Studies University in China and current adjunct senior lecturer at the University of Cape Town’s Graduate School of Business, tells the FM that the committees and cells that private companies in China were always required to host tended to become dormant during the Jiang Zemin and Hu Jintao eras between 1989 and 2012. “All Chinese companies do have CCP secretaries and now they are being revived,” says Kuo, who adds some perspective to the situation: “In the way Western countries control their corporations with laws and regulations, the CCP controls Chinese corporations, especially the powerful media giants, by putting members on the board.”
As Kuo sees it, the CCP’s attempts to exert control over its corporate sector is little different from the way Western governments clamped down on regulating the banking industry after the financial crisis.
If [the golden share] gives them what they want, you have more certainty and it could well allay fears regarding the VIE structures
— Peter Armitage
Anchor Capital’s Peter Armitage also sees an upside to the latest attempt by the CCP to exert more control. He acknowledges that at this stage there’s nothing the Chinese government can do that would surprise investors. “If [the golden share] gives them what they want, you have more certainty, and it could well allay fears regarding the VIE structures,” Armitage tells the FM. He believes the latest developments indicate that the CCP realises the need for a more stable and predictable environment from an operational and corporate perspective.
For Tencent, signs of a more stable and less antagonistic government approach have been particularly rewarding, given its increasingly aggressive share buyback strategy over the past several months. Last May, as the share price appeared to be in free fall, the company announced it had authorised the repurchase of as much as 10% of its outstanding shares in the period to May 2023.
Given the Chinese government’s increasing hostility towards Tencent’s traditionally aggressive acquisition strategy, diverting its huge cash flows to share buybacks seemed a reasonable long-term strategy. As the share price rebounds, it seems to be both extremely prescient and profitable. But not so much Naspers/Prosus’s continued sell-down of its Tencent shares.
When asked about the speculated golden share, Naspers told the FM it did not comment on Tencent matters.
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