In case you haven’t noticed, Naspers is getting far less love than Prosus. When CEO Fabricio Bloisi sends shareholder letters, they are on a Prosus letterhead. The last shareholder letter on the Naspers website is dated October 2024!
These Prosus letters are feeding investors a steady diet of bullish information on what the group is building: ecosystems across Europe, Latin America and India. In the latest letter, Bloisi makes just one reference to Tencent — and it’s in the context of “ecosystems excluding Tencent” being profitable and free cash flow generative.
This is part of a deliberate strategy to evolve the positioning of Prosus from an investment holding company (a Tencent proxy) to a builder and operator of “Prosus excluding Tencent”. It makes sense, as Prosus is essentially an ex-US tech play that gives investors a single point of entry to ecosystems in some exciting growth markets. This is exactly why Bloisi was chosen for the top job: he is a builder first and a capital allocator second.
The problem is that the market doesn’t seem to care. If you look at a year-to-date chart for both companies (we’ll use the American depository receipt in the US market so that both are in dollars), you’ll see Prosus is down 27% and Tencent is down 23%. If anything, the market is punishing the rest of the Prosus strategy and expanding the look-through discount.
Naturally, this leads to investors calling for accelerated disposals of Tencent shares and repurchases of Prosus shares to help close the discount. Technically, this would align with what management is trying to do: increase the extent to which the Prosus valuation depends on what Prosus is actually building.
But with the Tencent share price under this much pressure and with great uncertainty around what the AI era will mean for tech ecosystems, Prosus is taking a cautious approach. It is pushing ahead with share buybacks at an annual rate of $5bn, with Tencent shares dripped into the market as and when Prosus needs funding. It’s been a few years since we saw a block sale of Tencent shares by Prosus.
This is exactly why Bloisi was chosen for the top job: he is a builder first and a capital allocator second
This means that Prosus is probably going to remain a proxy for Tencent for an extended period.
South African investors are familiar with the Prosus strategy, but we don’t read much about the underlying performance of Tencent. It’s worth digging into the latest quarterly numbers from the Chinese tech giant.
The first point to note is that Tencent is primarily a platform play that makes most of its money from games, social networks and digital content. It has a strong fintech business as well. What you won’t find much of is the stuff that is really driving markets at the moment: AI hardware and compute. You certainly won’t find any core IP in chips.
Just like Prosus, we find Tencent telling an AI-heavy story around embedding proprietary LLMs in the ecosystem. This requires heavy investment, including a big catch-up on the infrastructure to support this strategy. This is exactly what the market is stressed about, as the revenue growth in Tencent (just 9% in the latest quarter) isn’t going to cut it if Tencent hits the accelerator pedal on AI investment.
It’s unfortunate that some of Tencent’s best days were ruined by a structural decline in Chinese tech valuations due to government interference. Tencent’s gross margin has increased from 45.5% to 56.5% over the past three years, while adjusted operating margin has jumped from 30% to 38.5%. The share price performance has been tepid, though, as improved earnings were offset by margin compression.
Unless the market starts feeling much better about the risk in China, this leaves Tencent as a sitting duck. Margins are likely to come under pressure, but the market is unlikely to reward the investment in AI in the form of a better valuation. We need only to look at US tech companies to see what happens when the AI cheques get written.
With US President Donald Trump looking to mend relations with China through a trade summit featuring the most influential business leaders in both countries, a more positive narrative on China might emerge. As interesting as the Prosus ecosystems are, it’s the sentiment towards Chinese stocks that will be the catalyst for a recovery in the share price this year.
For now, I’m holding Prosus. Early headlines from the US-China trade meeting were cautiously optimistic. Before I add to my position, I would want to see meaningful evidence of a rally and a sentiment shift that can more than offset Tencent’s AI ambitions.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.