Buying Opportunities In The Internet Industry With Huge Discounts

Summary

• E-commerce and online businesses continue to soar in emerging markets creating great opportunities to invest.
• Global players are targeting emerging market internet businesses seeking to expand their activities in fast-growing economies.
• Buying Naspers Ltd. is a great idea for long-term investors willing to have exposure to the internet industry and exposure to growth opportunities in China, India, and Brazil.
• Buying Naspers means buying Tencent at a huge discount, receiving for free other Naspers' operations.

Internet Businesses in Emerging Markets

E-commerce and online businesses continue to soar in emerging markets and various global e-commerce studies indicate that we can expect to see further growth in online transactions worldwide. The main driver for e-commerce growth in developing markets has been the rise in internet access and the use of smartphones. Other factors propelling online retail are expanding incomes, which are resulting in a larger emerging middle-class shopping online for products and services.

More than half of the world's internet users are now in Asia. The majority of the global middle class is in emerging markets (EM) and nearly 90% of the next billion entrants will come from Asia, according to the Brookings Institute (The unprecedented expansion of the global middle class).

The overall annual online retail sales across the biggest emerging markets, which included among others, China, Brazil, India, Mexico, South Africa, Russia, Saudi Arabia, and Turkey - could reach more than 2 trillion US dollars until 2019.

There are many reasons for investors to be excited about emerging markets today. Yet it remains true that these markets can be difficult to enter as an individual investor:

• returns on investment are more volatile than in developed markets;
• understanding market fundamentals is challenging due to faster shifts in consumer preferences and in regulatory and policy patterns.

My purpose in this article is to present a company with a long record of very successful capital allocation, Naspers Ltd. (OTCPK:NPSNY). I think that buying Naspers can be a well-diversified bet in different internet businesses across many countries in emerging markets.

About Naspers

Founded in 1915, Naspers is a global internet and entertainment group and one of the largest technology investors in the world. The company is headquartered in Cape Town, South Africa and operates in over 120 countries. For more than 100 years, Naspers has grown by investing in, acquiring and building leading companies with sustainable competitive advantages.

Naspers is listed on the Johannesburg Stock Exchange (NPN.SJ), has an ADR listing on the London Stock Exchange (LSE: NPSN), and OTC ADR in USA (NPSNY:OTC US).

Source: Naspers - Annual report 2018

The group has sizable investments in Tencent (OTCPK:TCEHY) (OTCPK:TCTZF) (SEHK 00700), Flipkart (FPKT) (the Amazon of India), Mail.ru (OTCPK:MLRUY) (LSE: MAIL), and MakeMyTrip Limited (MMYT).

Please see at the end of the article the complete list of Naspers' subsidiaries.

Naspers' crown jewel: Tencent

Naspers might have remained a little-known publisher of South African newspapers and operator of pay-TV services if not for the decision to invest in Tencent. In 2001, the South African media company Naspers Ltd. invested $32 million in Tencent Holding Ltd. when Tencent was an obscure web firm in a nation where few people used the Internet. That stake would be now worth $155 billion, one of the greatest venture-capital investments ever.

Tencent is China's largest and most popular internet service portal, now ranking as one of the largest internet companies in the world. Its businesses, products, and services have created China's largest internet community, providing social networking, gaming, messaging, payments, communication, and information.

While the investment has made Naspers the most valuable company in Africa, its market capitalization lags well behind the value of the Tencent Holding. Naspers recently raised $11 billion selling a slice of its Tencent shares and plans to use the money to accelerate the growth and scale of its e-commerce businesses and tech investments. Even after the sale, the value of Naspers' Tencent investment, about $144 billion, dwarfs the South African company's market value of $101 billion. That means investors see no value in Naspers' payment services, food delivery, and classifieds operations.

Other Holding with large potential for growth: Flipkart

One example of the other businesses Naspers holds is Flipkart, an Indian company serving in the electronic commerce sector and headquartered in Bengaluru, India. Reuters recently reported that Walmart Inc. (WMT) is likely to reach a deal to buy a majority stake in Indian e-commerce player Flipkart by the end of June in what could be the U.S. retail giant's biggest acquisition of an online business, two people with direct knowledge of the matter said. Walmart close to buying majority of India's Flipkart.

Naspers holds a 16% interest in Flipkart and Japan's SoftBank Group (OTCPK:SFTBY) owns roughly 20% of Flipkart. According to Naspers 2017 Annual Report, Flipkart remains a large opportunity, with market estimates expecting the online retail market in India to reach US$50bn by 2020. Competition has intensified in the past year, with Amazon gaining market share in the early part of the year. Meanwhile, Flipkart has maintained its leadership position, with recent market share trends suggesting gains.

The Investment Thesis

I consider that Naspers by itself is a good company to invest, a company that has a long trade record of profitability and cash generation, besides being a very successful capital allocator.

Naspers is currently in a heavy investment cycle and spending money on building substance in emerging market e-commerce and other online businesses. All that should add value to Naspers when most of those businesses become more mature and bring attention to global players such as Amazon, Walmart, and others to gain penetration in some countries in emerging markets.

Naspers is also considering buying back shares, once the company starts producing excess cash. "At the moment we are consuming cash and we don't think this is the right time to buy back our own shares," said Naspers Chief Executive Officer Bob Van Dijk.

Van Dijk has been looking for new investments to replicate the Tencent success; he's put cash into a range of internet companies from the U.S. to Russia and India. Naspers will use the money from the sale of Tencent shares to invest in its classifieds, online food delivery, and fin tech businesses and make other investments, he said.

I believe that buying Naspers stocks is a great idea for long-term investors willing to have exposure to the Internet industry and more specific exposure to growth opportunities in China, India, and other emerging markets.

Valuation of Naspers

As a GARP (growth at a reasonable price) investor, I want also to explore how reasonable is the current Naspers stock price.

I will present three ways to show that Naspers looks somewhat undervalued, despite having solid sustainable growth potential.

1 - Sum of the parts analysis (SOTP) would give a fair price of ZAR520, considering a 20% discount to account for the indirect holding. An upside of 70% when compared to the stock price ZAR307 as of April 12, 2018.

2 - Friedrich Global Research algorithm: Naspers remains undervalued and is a clear buy at the current price. According to the Friedrich algorithm, that calculates the fair price mainly based on free cash flow, the fair value of the Naspers New York ADR is US$155. An upside of 300% when compared to the stock price US$51 as of April 12, 2018.

Source: Friedrich Global Research

3 - Naspers market cap compared to Tencent.

Naspers Ltd. owes a 31% Tencent stake, which is worth $144 billion or about 30% more than Naspers itself.

Tencent's 2019e trading P/E of 32x on my non-GAAP estimates is in line with its historical P/E trading band, with strong momentum in mobile games, advertisements, and payments. Among China's Internet leaders (i.e., Baidu (BIDU), Alibaba (BABA), and Tencent - "BAT"), Tencent has historically enjoyed a premium valuation, given its strong revenue growth and earnings visibility.

As we can see on the next graphics, both the price and the market cap of Naspers are lagging behind those parameters of Tencent's stock, and the valuation gap is further increasing.

TCEHY Market Cap

data by

YCharts

NPSNY

data by

YCharts

Reasons for Naspers being traded at a discount

There are reasons for Naspers being traded at a discount when comparing Naspers market capitalization to the 31% Tencent stake.

• Disadvantages of buying holding companies, such as liquidity issues.
• Difficulties in valuation of a holding company stock.
• Taxation implications from a Tencent sale. The company says that South African companies that own >10% of foreign subsidiaries do not need to pay capital gains tax. The asset is held through a vehicle in the British Virgin Islands and most of the cash could potentially be reinvested outside of South Africa.
• The market is short-term-natured, and it sounds that most of the Naspers' shareholders are impatient and frustrated, willing now to break off Tencent and some other assets. The main reason is that the Naspers' share price reflects just a small part of the net assets of holding company.
• The currency risks involved on both Naspers and Tencent. For long-term investors, it should not matter much in face of the high valuation gap.

All that said, I consider buying Naspers stocks is a great idea for long-term investors willing to have exposure to the Internet industry, and in particular to growth opportunities in China, India, and other emerging markets.

Takeaway

Naspers stock is a suitable investment for growth-oriented investors, a stock that has high potential to deliver above-average gains over the next years.

The company has a long record of very successful capital allocation and is currently building substance in emerging market e-commerce and other online businesses. Naspers Ltd. can be considered a well-diversified bet in many different internet businesses across many countries in emerging markets.

By many different valuations methods, Naspers is undervalued by reasons that will likely be vanished with time and with a more proactive communication of the management team to their shareholders.

Naspers has a 31% Tencent stake, meanwhile, it's trading at a discount when comparing the Naspers market capitalization to the quotation of the Tencent stake. Therefore, buying Naspers looks an attractive investment to whom can wait to see the valuation gap be reduced.

Naspers' Subsidiaries: OLX, Allegro, Avito.ru, Media24, MultiChoice, MIH Internet Europe, PayU S.A., Irdeto, MIH HOLDINGS LTD, MIH Allegro B.V., MIH Internet B.V., Bomnegocio Ativades Ltda., BayTSP, Inc., OLX B.V., MIH Web Private Limited India, PayU Payments Private Limited, MIH Limited, Ricardo Italy, PayU Payment Solutions (Pty) Ltd, PayU Group, Ambatana Holdings B.V., Media24 Holdings (Proprietary) Limited, Property24 (Pty) Ltd., PayU Global B.V., Multichoice African (proprietary) Limited, Media24 Proprietary Limited, Nasou Via Afrika (Pty) Ltd, Boland Koerante (Proprietary) Ltd., Multichoice Sa Holdings (Proprietary) Ltd., Markafoni Ltd., Multichoice Subscriber Management Service (proprietary) Limited, Mooivaal Media, SUPERSPORT INTERNATIONAL HOLDINGS LTD, Intelprop Proprietary Limited, Mih India Global Internet Limited, Naspers Properties (Proprietary) Limited, M-Web Holdings (Proprietary) Limited, Tokobagus Exploitatie B.V.,, MIH Internet SEA Pte. Ltd., FixeAds B.V, Boland Koerante (Eiendoms) Beperk, MIH Investments (Pty) Ltd., QXL Poland Sp. Z.o.o., Electronic Media Network Limited (Pty), Shanghai Sportscn.com Information Technology Ltd., Multichoice Supplies Proprietary Limited, MultiChoice (South Africa)

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I am/we are long NPSNY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.