Tencent numbers under review

Tencent released their numbers about halfway through our session here yesterday, a little after midday. These were numbers for their third quarter to end September, you can download the release here: 2014 Third Quarter Results. Revenues are all measured in Chinese Yuan, Remnimbi, for the purposes of this conversation we will of course talk about the share price of Tencent in Hong Kong Dollars, the impact on Naspers in Rand terms, the results however in Chinese Yuan.


What is Tencent? I think that many people struggle to see that the company is an entertainment one, communication, an online portal with news and lastly an online shopping portal. Most people when I speak to them have a vague idea that the business is a Chinese one, offering internet and other add on services, of course they are zoning in on the right course.


QQ, Wechat, that is the communication part, Qzone is used for the social networking tool, a virtual public diary. A blog post place. The QQ Game Platform is huge, massive. That business is segregated into the Value Added Services (VAS) which contributes 16.047 billion of the total 19.808 billion Remnimbi for the quarter. The business is mostly driven here, by the Value Added Service. Then there is an exciting ecommerce business, that is only 0.459 billion Remnimbi, that did manage to grow at 76 percent on a year on year basis. Small, able to grow quickly however.


I think that the disappointments came from the levelling off of the subscriber numbers, the number of QQ monthly average users (MAU) grew only 1 percent (year over year) to 820 million, I guess that has to happen at some stage when you have this massive finite base, you cannot continue to grow forever. I think that the same will happen to Facebook, they need to crack new markets quickly, Facebook that is. The QZone MAU was only up one percent to 629 million. Those are incredibly huge bases of which to leverage off and monetise.


OK, earnings, and this is where we can stick it all together. The price in Hong Kong is nearly 130 HKD, which is around 16.75 US Dollars. Quarterly earnings of 0.605 Remnimbi equals 0.77 Hong Kong Dollars. Even if you manage to annualise that, Tencent trades on a multiple of 40 odd times, not something that you would put into the cheap category. When earnings grew 46 percent over the comparable quarter however, then on a PEG basis (price to earnings (42) divided by the growth rates (46)) then the PEG ratio, another crude fundamental metric, is below 1. On a relative basis, not extended at all.

The key here for us as Naspers shareholders is the age old one, is the sum of the parts and the rest of the business relative to where Naspers trades now. We can use our age old formula:


Take the TenCent market cap in Hong Kong = 1200 billion Hong Kong Dollars, or 1.20 trillion HKD. Naspers owns 33.85 percent of Tencent, that translates to 402 billion Hong Kong Dollars. Now one Hong Kong Dollar is equal to 1.45 Rand. So, quite simply, multiply 402 billion HKD by 1.45 and that equals 581 billion Rand. At last close, Naspers had a market capitalisation of 573 billion Rand.


So, in simple terms (as at last evening close), the stake in TenCent that Naspers has is worth more than the market is willing to pay for Naspers as a whole. Madness, we continue to buy Naspers, the Tencent stake is about the same now, with a nearly four percent gain. The rest of the business, fast growing, well, those are for free if there ever was such a thing.