28 Dec

Hong Kong Can Save the African Whale

Naspers Ltd. isn’t so much a fish in a pond as a whale in a teacup. It accounts for almost a third of the MSCI South Africa Index, more than six times the weighting of the next biggest company.

That top-heaviness is the legacy of one of the great technology bets of all time: 16 years ago, Naspers invested $34 million in an obscure Chinese internet company called Tencent Holdings Ltd. As of Thursday, its one-third stake was worth $159 billion.

That success has lifted Naspers to a market capitalization of $114 billion. Yet it should, arguably, be worth even more. The Tencent holding alone has a value about 40 percent higher than the entirety of Cape Town-based Naspers, a business that includes Africa’s biggest pay-TV operation, classified advertising websites in Russia, and e-commerce investments around the world.

Anyone betting the discount will close may need plenty of patience: It’s persisted for almost two years and is widening. Naspers shares rose 77 percent this year in dollar terms; Tencent is up 107 percent in Hong Kong, adding 2.3 percent on Thursday after another blowout earnings report.

The limited size of the African company’s home market is at least partly to blame. While conglomerate discounts are common, domestic fund managers are likely to hold fewer shares than indicated by the benchmark index when a company reaches this level of dominance, to avoid concentration of risk. A case in point: BlackRock’s  iShares South Africa ETF underweights Naspers by 7 percentage points relative to the MSCI gauge.

Naspers could try selling some Tencent shares to narrow the discount, though the size of its stake means this probably wouldn’t be more than fiddling at the margins.

In any case, it may not want to sell. As Gadfly argued in August, owning Tencent puts Naspers in a similar position to SoftBank Group Corp. with Alibaba Group — in the box seat to gain access to other promising technology startup investments. Besides, Tencent’s stock has momentum and may push higher.

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