Tencent 1Q numbers

Tencent released their first quarter numbers yesterday, after the Hong Kong market had closed for business. There is a Tencent ADR in New York (I was watching that too closely yesterday afternoon) and of course you get the sense that Naspers trades as a proxy for Tencent. Huh? Remember the old trust calculator? No, OK, there is no harm in doing the simple math again:

Take the Tencent market cap in Hong Kong, which right now is 1.50 trillion HKD. Naspers owns 33.85 percent of TenCent, that translates to 508 billion Hong Kong Dollars. One Hong Kong Dollar at the current exchange rate is around 1.53 Rand. So, quite simply, multiply 508 billion HKD by the prevailing rate and that equals 779.34 billion Rand. Naspers had a market capitalisation of 771 billion Rand at the close last evening, that included a sharp move higher of 3.6 percent during the day. Obviously the wind at their backs following these results. The difference between what the stake in Tencent is worth, relative to what the JSE buyers are willing to pay is minus 8 billion Rand.

That is apparently what all the rest is worth, negative. Thanks for that South Africa. No wonder people trade the "Naspers stub", the difference between the two, provided you have access to all the markets. Here are the Tencent results, to jump back to where we started: Tencent announces 2015 Q1 results. A 22 percent increase in revenue, a 20 percent increase in operating profits year on year. Basic EPS for the quarter was 0.741 Renminbi per share.

The stock however trades in Hong Kong, represented in Hong Kong Dollars. The company also translates a lot of their numbers back to US Dollars, so you need to do a number of currency translations here. Diluted EPS was 0.733 Renminbi, convert both those numbers to Hong Kong Dollars and you get Basic EPS of 0.93 Hong Kong Dollars and Diluted EPS of 0.92 Hong Kong Dollars. The stock trades at 161 Hong Kong Dollars, as I write this.

Revenues were driven by an eye popping increase in their advertising business (online advertising business revenues increased 131 percent year on year), thanks to stronger mobile video sales. Still, the big daddy of them all, mobile gaming strong (revenues up 82 percent year on year) alongside the main part of the business, PC gaming. League of Legends you will be less familiar with over FIFA Online 3 (a variant of the EA one I guess), where people swap cards. In the outlook the company says: "Looking ahead, we aim to enrich our PC and mobile game portfolios in different genres and solidify our market leadership."

Tencent is an entertainment platform. Think about what passes for entertainment in China, online platforms are perfect ways of escaping the humdrum on "ordinary" life. State TV, State Radio, censored internet, that is the alternative. Heck, some movies don't make it past the censorship board, they are too saucy. I can think of a recent movie adaption of a bunch of poorly written yet exciting books that had to be sliced and diced. Escaping into a world where you have more control than normal, I can see the attraction of the platforms. More recently however there are other arms to the business, the number of subscribers in the chat business seems to have peaked, I guess it was bound to at some stage. The number of users on mobile networks, that continues to grow strongly. This is the shift to mobile, all businesses seem to be coping just fine.

We continue to recommend Naspers, remembering that you are effectively getting all the new (online retail) and older businesses (satellite TV) for basically nothing. This asset will continue to be the steer for the Naspers share price, I could think of a whole host of worse investments however to be in! Until the powers that be at Naspers decide that they will unlock value in a mother way for shareholders, you should not get that anxious about the Tencent share price, the multiple is unwinding as predicted (at above 40 times earnings it is still expensive however), the growth rates are still there. There are new and exciting businesses, Tencent spends a large sum on R&D and allocates many resources to their future.