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Naspers Undervalued - Tencent Earnings

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Not applicable
Hey Folks. Pay attention. Naspers has a 35.5% stake in Tencent Holdings a publicly traded Chinese Internet company (http://www.google.com/finance?q=700) - this internet company has market cap of 210 billion HK dollars. The market value of that stake is now worth about R77 billion, which means it accounts for around 81% of the market value of Naspers. What does this mean? It means that Naspers' other assets like it's Pay TV business are actually trading on an implied P/E of like 4, which is absurd. Naspers is on a 2009 P/E of about 14. But Tencent is on a 2009 P/E of about 50. If you play with those numbers - the fact that 81% of Naspers value is from Tencent - you'll see that Naspers deserves to be on a 2009 P/E of 40. Which means it should be worth well over R400. I guess the reason it's so low is because the majority of South African traders aren't sophisticated enough to understand internet company valuations. I think this is a huge BUY. Tencent's earnings come out tomorrow (Hong Kong time). I currently have more futures exposure than my net worth. What do you all think?
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33 REPLIES 33
SimonPB
Valued Contributor
with respect, nobody understands internet company values .. hence the dot.com becoming dot.bomb .. and the rest of NPN's business may deserve a higher PE then 4, but certainly not 40 ??
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Not applicable
With that exposure, you are going to be either buffets long lost grandson in the near future or we will sorely miss you on this forum. what does spring to mind is the IT bubble of the 90's when someone values internet companies beyond their actual intrinsic value traded on the market. Good luck and i will take the "I told you so" with a huge slice of humble pie when it works for you.
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Not applicable
Thanks for the replies you guys. If you really don't agree with me I dare you to sell the futures. Tencent has a 2010 P/E of 30, and this is routine on the Nasdaq even today. I live in the US so I guess I have a higher tolerance for these valuations. I also just did an internship at an asset management company in Cape Town where I spent the whole time looking into Tencent. They're also super optimistic even though they manage pension money.
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SimonPB
Valued Contributor
nah.nah .. you're making the mistake of thinkign there are only two possible positions to take .. long or short .. there is a third, out .. all are perfectly valid ..

an how much research you done on the HK exchange ?? the chinese exchange is largely legalised gambling, is HK the same ??
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Not applicable
Sure, but I guess you're not putting your money where your mouth is. I didn't research the exchange per se but HK is known to be pretty good compared to Shanghai. I researched the stock, and they've beat earnings expectations over and over again. They've been upgraded by Goldman Sachs & Credit Suisse recently. There online games (their main businesses) are breaking new records.
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SimonPB
Valued Contributor
indeed not .. your money .. your mouth ..
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john_1
Super Contributor
Thing is this...if you know it.. so does the market...and for what ever reason the market has decided its value is x (todays price) to expect that tomorrow they will see the error of their ways to enrich you is just a little wishful... I am not doubting your research and in time the price may well rise to 400 but do you want to ride that boat with that much leverage.
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Not applicable
come on guys, you are all traders - so this debate is irrelevant. NPN could easily flag an entry on a trading system. I for one am long on it - have been for the last week, but its relative weakness means that I will exit before my stoploss if the market shows signs of real weakness
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Not applicable
Agreed, but the issue here I think is more the P/E ratios discussed. Going from 14 to 40 is a bit of a stretch (2.5 times up) in the medium term. But also no time frame is given, other then the deadline of results out tomorrow. Will this suddenly make Naspers jump the 60% it needs to reach 400? I am doubtful. Will it get there? Well that is like trying to predict the outcome of the global recession. Anything is possible but right now hype on internet company valuations is a little premature. The long position is a definate (for now any way) but that could change tmorrow.
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richardw
Super Contributor
According to http://www.google.com/finance?q=HKG:0700 Tencent has a P/E of 57 in a seriously overheated Chinese market, so it's not a buy-and-forget at all.
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richardw
Super Contributor
Lemmie add to that. You're assuming the Tencent P/E can be taken as a given, and working out the Naspers expected P/E from that. To double your money, Tencent would have to go to 120 P/E. To lose half of your money, Tencent would have to drop to 30 P/E. I hope you have an equally sophisticated HFT system running to pull you out of trouble when a greater fool doesn't arrive.
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kwagga
Super Contributor
Richard. Your strategy is based on so many assumptions, but for your sake I hope everyone wakes up to unlock Naspers real value before the next leg down, which by the way is upon us. Check out the Naspers 2007 report published under Buy and Sell ideas. Hope you're willing to have a few sleepless nights while you wait for that value to unlock. It could take a few years.
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Not applicable
You're right about that P/E got higher since I did the research but my point is that it is substantially lower than Naspers' P/E even though it makes up 81.5% of Naspers value. This is key. I feel even if there's an adjustment on Tencent's numbers Naspers is still trading way too low. I heard that international Tencent investors are now looking at Naspers as a cheap way to get Tencent exposure - so even if everyone here stays pessimistic that buying pressure should help. I think there's a lot going on here.
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Not applicable
Thanks everyone. I guess I can summarize the reason for my bet in the following question. Can anyone try to explain why since Friday's close Tencent is up 9% yet Naspers is up 1.93%? That doesn't make any sense to me because Tencent is 81.5% of Naspers value. Even if you consider this a really bad day for Pay TV and factor in the small changes in currency you'd still expect like a 6% increase in Naspers today with an arbitrage argument.
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richardw
Super Contributor
Or you could go short Tencent and long Naspers. That would protect on the downside and you benefit from any convergence. Obviously you get hurt if Tencent goes more barmy and Naspers tanks...
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Not applicable
Even if that changes to 8 or 10 P/E - or any semblance of industry average - this bet makes a lot of sense.
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Not applicable
Hi, thanks. Which 07 report? Or better what were the key insights in that report. Tencent was trading at less than half it trades now in 2007 - and a lot has changed in the internet space.
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Not applicable
Exactly right... that's what anyone who doesn't like Tencent should do - problem is if you'd been doing that for the last year you would have been murdered since Tencent has doubled and Naspers hasn't caught up.
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john_1
Super Contributor
If naspers has not responded the whole year why would you use a geared trade now. A company is often less than the sum of its parts..just look at Remgro..it trades well below the market valuations of its component companies...
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