The Money Show  00:00

 Well, Naspers and Prosus have initiated a plan to slowly sell off parts of its stake in Chinese tech giant Tencent and buy back its own shares. This comes as Naspers and Prosus reported a significant drop in core headline earnings due to a period of slower growth at Tencent. The group also realised approximately $3.67 billion through the disposal of its shares in jd.com. Now to unpack this with us, is Siboniso Nxumalo, Portfolio Manager at Old Mutual Investment Group. Welcome to the show, Siboniso, big story coming out of the local market today.

 Siboniso Nxumalo  00:45

 Hello. Good evening to your listeners. Ja, busy day in the market, where there is actually only one story, which is the largest company on the JSE, the Naspers -

 The Money Show  00:58

 That's all that matters, isn't it?

 Siboniso Nxumalo  01:00

 It is all that matters. And it moves the market. If we look at the Top 40, it was about three percent at some point, but it closed around up 2.55%, primarily driven by Naspers, which closed almost 23%, and Prosus, which was up 18%. Negative side, if we just mention those, the South African banks, we had Absa down 4, First Rand down two and a half, Standard Bank, etc. But again, we've got to talk about the Naspers/Prosus Group. And that's where I think the results of the day was. So, should we go to that?

 The Money Show  01:38

 Ja, ja, you can go straight into that, just unpack that for us.

 Siboniso Nxumalo  01:41

 Perfect. So, I mean, walking into this result, you first just take a step back and reflect on context. Walking into these results, the Naspers/Prosus Group had been under severe pressure and underperforming the market over the last year and year to date. Quite materially, too. And so, they were worried in terms of the business. We had seen widening losses, in terms of what is called the "rump" by the investment market. But actually, which is the underlying businesses that are going to mature, which are still incurring losses at this moment.

 The Money Show  02:17

 Siboniso, if you can just hold it for us there, we're not hearing you very clearly, we're going to try and get Thekiso to get you on a much clearer line to tell us more about that Naspers story, and how Prosus is looking to sell its Tencent shares, of course, releasing that news on the market today, saying that they're looking to sell those shares to make up some of the money they've lost. We know there is a China crackdown on tech shares, and that's really hurt Tencent and in turn, has hurt Naspers as well as Prosus. We're also going to be speaking to Siboniso about the PPC results that came through today. They're saying they're doing a bit better, but their Zimbabwe business dragging their earnings down as well. We're also a few days away, you know, from some data coming out of South Africa in terms of consumer confidence, and that employment data coming tomorrow from Stats SA, so we're going to be talking to Siboniso about that. We're just trying to get him on a better line, so he can tell us what this means for the JSE darling, Naspers, which went up 22% today after Prosus, the Dutch subsidiary, said they were going to sell their Tencent shares. I think we do have him back on the line now. Siboniso, let's hear if you are on a better clear line. 

 Siboniso Nxumalo  03:35

 Yes.

 The Money Show  03:36

 Ah, there we go.

 Siboniso Nxumalo  03:37

 Can you hear me?

 The Money Show  03:38

 Ja, ja. We're clear now. Just tell us about the billions that will be changing hands, you know, as this deal comes through.

 Siboniso Nxumalo  03:44

 Yes. And so, I think, what I was trying to say is like, walking into this result, there were a few worries in the market, which had led to the underperformance of Naspers and Prosus. Those were widening losses in the underlying yet to mature businesses that Naspers/Prosus are investing in, we will come into that a little bit later. Also, the balance sheet - after the balance sheet wasn't as strong as it had been previously because management had invested and utilized the money. And obviously with the Russia/Ukraine, they had a business in Russia, which was quite cash generative, which you couldn't have access to the cash too. So, the balance sheet was a worry. 

 But the biggest thing was a discount to what is called the nav. And basically, if you looked at the market cap of Tencent and what the value of Tencent on the Naspers shares, the market - well, the implied value that was actually directly in Naspers and Prosus was trading at a material discount to what the actual Tencent holding was. Some of that has got to do with tax. Some of that has got to do with a complicated structure of Naspers/Prosus crossholding, but some of that actually was the market just losing faith in management's ability to narrow that particular discount. So, today, management came out guns blazing. And they said, no, we are going to solve this discount. And they came up with what is a clear plan, which is this open-ended buyback, where they are now willing to sell some Tencent shares in the market. It's going to be relatively 3 to 5% of Tencent shares incrementally over time to buy back their Naspers and Prosus shares, and the market loved it. 

 The Money Show  05:29

 It did, didn't it because we saw a surge in shares, Siboniso. You know, I was looking at the story early in the morning, I was like, I wonder how this is gonna turn out by market close, but both of them surged. Do you think investors had been waiting for this kind of move?

 Siboniso Nxumalo  05:45

 Yes. No, if you look at the investment case, the investment case of the Naspers/Prosus Group, largely hinged on you are accessing one of the best companies in the world, Tencent, in China with a massive growth path. And actually, it's just a phenomenal business. You're accessing at a very large discount from South Africa. And so, the market had been putting a lot of pressure and asking a lot of questions of management about, hey, what are you going to do to narrow this discount and crystallize the value and create value for us? And so, management during this saying, hey, we are actually doing something, and we are acting and we're willing to sell Tencent. And I think the key controversy here, was that previously management had committed that they were unwilling to sell Tencent, I think until about 2024.

 The Money Show  06:33

 Ja, I remember Prosus saying that. Ja.

 Siboniso Nxumalo  06:35

 So, that's all changed. And so, before them saying, hey, we're willing to sell these assets in order to buy a cheaper entry into actually what is materially the same assets. That makes sense, that makes quite a lot of sense. And the market obviously loved it. And we saw improvement, actually, the discount.  Naspers, I think, went from 57, to about 36/45, Prosus went from 45 to 34%. So, immediately, the discount narrowed, because the markets price the future, and the future is, management's going to sell some Tencent shares and buy some Nasper/Prosus shares cheaper. And that's actually seen to be quite a good thing. But there are also questions that I think investors need to ask over here, because you are selling what is a phenomenal asset in Tencent, in a very large country, very large economy, that historically has been fast growing. And in selling that, actually, the core of what you are buying back, actually, in Naspers and Prosus, is still a business.

 So, if we look at the actual numbers because this was part of the result. So, if you look at Naspers/Prosus, if you look at the E-commerce business, I think revenue was up 51%. Sounds amazing. So, classifieds up 93%, food delivery, up 77%, payments up 45%. All these numbers sound phenomenal, until you get to the bottom line, the trading profit line. We can see that in trading profit, the classifieds business only made 25 million, that was down 59%. The food delivery business - in South Africa, we're familiar with a company like Mr Delivery, Naspers owns that. The food delivery business as a whole made losses of $724 million. That's quite a lot.

 The Money Show  08:24

 That's painful, that's painful.

 Siboniso Nxumalo  08:25

 It's very painful. And it's growing year on year. And the payments, lost $60 million. And the ed-tech business lost $163 million. Now, these losses are not narrowing. And so, therefore you're selling a profitable, highly cash generative business in a country with a massive population. And you're buying back, at its core, businesses that are yet to mature that still require large investments. And so, over time, that's where the question is going to be. Because if you look at even the Naspers/Prosus the free cash flow. Last year, the free cash flow was $126 million inflow. This year, it was basically half, it was 562 outflow. And so that's the cash flow profile of the group as they invest in these businesses, actually is questionable. So, I think the trick here is the next step management have to work on the complicated structure of Naspers/Prosus holding Tencent. But the other thing is they have to turn these businesses around, especially the food delivery business, because that as a business model isn't quite proven yet to be profitable. And if they turn that around, then that's how actually the rest of this discount will probably narrow.

 The Money Show  09:45

 Ja, but Naspers and Prosus have been quite patient with the Chinese market, especially at the beginning of the crackdown on tech shares in China and tech companies in China. They took the pain then. Do you think, you know, that they tire and decide, you know what, let's just cut our losses.

 Siboniso Nxumalo  10:03

 No, I don't think it's about that. I mean, they've helped Tencent, Tencent has been probably one of the - well, it's easily one of the best investments to have ever been made by a South African company. And so, it wasn't about cutting the losses. In fact, they are selling Tencent at a very low price at this moment. So, you can ask those questions too. But it's just that at some point, the market had lost faith in management's ability to narrow this particular discount.

 The Money Show  10:32

 Oh, I think Siboniso's loadshedding letting him down... Ja, no, I think we've lost that line. Siboniso Nxumalo is a Portfolio Manager at Old Mutual Investment Group, just unpacking that complicated story in terms of Naspers and Prosus, and how they're going to be unbundling those shares definitely from Tencent, and also making sure that, you know, they're not really letting go of the business, but they're making sure that they can boost up their own earnings as well as Naspers came out today and saying, that Prosus is going to be say selling their tech shares in Tencent, and they're going to be letting go of some of those shares to the market. But the market responded positively to those news, Naspers up 22%, and that pushed up the All Share today by more than 2%.