Napping Giant

“So remember, Naspers owns 33.85 percent of Tencent. Tencent currently has a market capitalisation of 1.66 trillion Hong Kong Dollars, Naspers’ stake is worth 561.91 billion. In Rand, at the current exchange rate of 1.91 Rand to the Hong Kong Dollar (using Google), that equates to 1.07 trillion Rand. The current Naspers market cap, as per the closing last evening, was 985 billion Rand. In other words, the other parts (or some parts) must be worth negative, when the market calculates the sum of the parts valuation of Naspers.”


 

To market to market to buy a fat pig A mixed bag on the local front. No, let me rephrase that, pretty much an average day all around for the local market, and by saying “average” I am being very generous. Resources were much lower, down nearly three percent, industrials and financials also took some heat, stocks as a collective were down 1.12 percent by the end of the session. We closed near the session lows, mining heavyweights like Glencore and Anglo, as well as BHP Billiton were down more than four and a half percent (and more). The “winners” amongst the majors were few and far between. Banks and financials as a collective also took a bit of heat.

Two of our biggest (by value) and most widely held stocks however were in the news, first, Aspen (which we discussed at length yesterday – Aspen debt raise & deal with AstraZeneca) soared 9.2 percent on the day, to levels last seen in August last year. Year to date the stock has now comfortably outperformed the index, now up 13 and a half percent, thanks mostly to the announcement yesterday. Over 12 months the stock is a smidgen (just over a percent and a half) lower. From the all time highs in January last year, the stock is still down nearly 20 percent, as ever (we say this a lot) it matters where you draw your line in the sand.

The other notable story was not directly related to one of the companies that we own, the makeup of their NAV depends almost entirely on this company though. You guessed it, we are talking about Naspers and Tencent. The Chinese “internet” and entertainment company, Tencent, is rumoured to be, as per the Bloomberg story Weighing Supercell Deal at $9 Billion Valuation. This morning the stock (Tencent) has traded at a 52 week high, and in fact it looks like an all time high to me. In fact the closing high from yesterday is the all time high.

Why do we always fuss about Tencent when we talk about Naspers? For those of you not familiar over the years with the “what is Tencent worth to Naspers” calculator, it is a very simple one. It is their stake (Naspers) in Tencent, back to Rands from Hong Kong Dollars, and of course compared relative to their market cap. So remember, Naspers owns 33.85 percent of Tencent. Tencent currently has a market capitalisation of 1.66 trillion Hong Kong Dollars, Naspers’ stake is worth 561.91 billion. In Rand, at the current exchange rate of 1.91 Rand to the Hong Kong Dollar (using Google), that equates to 1.07 trillion Rand. The current Naspers market cap, as per the closing last evening, was 985 billion Rand. In other words, the other parts (or some parts) must be worth negative, when the market calculates the sum of the parts valuation of Naspers.

Remember that currently Naspers is losing money hand over fist in their ecommerce businesses. Talking of which, Bloomberg reported yesterday that Naspers Said to Plan Sale of Polish EBay Competitor Allegro. That business could be worth as much as 3 billion Dollars! Or 45 billion Rand. Or roughly 4.6 percent of the current market cap. And that is my point, there are some businesses inside of Naspers that don’t really feature high on the list, yet, as you can see, they are a huge part of the business.

This also ties in nicely to the piece that we had yesterday, not all companies can be measured against one another using the same metrics. Whilst on an out and out earnings basis, the market is predicting that Naspers trades on a 50 plus multiple forward (for this year just past). Tencent trades on a 45 multiple historic and 33 (and a half forward), with a PEG ratio of 1.29 times. I couldn’t “find” it for Naspers, their PEG ratio. Both companies, as you would expect, have similar metrics. To talk about a historic multiple of 100 and forward of 50, shows you that earnings are growing really fast, and whilst you could argue that the market has it wrong, it almost always seems to me that the local market discounts the whole business relative to Tencent. We still continue to accumulate this business at these levels.

Lastly, if you struggle to understand Chinese culture and entertainment patterns, why they are drawn to sitting in front of computer screens engaging in League of Legends, don’t drive yourself crazy. It is called e-sport. It is a different kind of entertainment, where you can immerse yourself in the virtual world and be anybody you want. ESPN reports on global rankings, if you are interested – League of Legends global power rankings through June 8. There are tens of millions of online active people a DAY, who partake in League of Legends. It is a phenomenon.

Much like World of Warcraft, the movie that is. Check Quartz Asia – The record-breaking debut of “Warcraft” divided China’s moviegoers into two opposing clans. Someone else (it may be your spouse person) may think your obsession with your favourite sports team or series is dumb, the fact that it counts for entertainment means that there is money to be made somewhere!

Stocks over in New York, New York, recovered from their worst levels at about midday. The nerds of NASDAQ closed down one-third of a percent, the broader market S&P 500 ended 0.17 percent lower, whilst the Dow lost just over one-tenth of a percent. The “journal” (WSJ to us mortals) reported in their market update (Stocks Near Records Despite Decline as Yields Fall) that recessionary fears had abated since the beginning of the year, hence that is why the stocks have gone up and bond yields down. Got it?

And that old fellow Soros said that he was bearish again on stocks. Cullen Roche took him apart in a blog and on Twitter, see – Beware of Guru Worship – George Soros Edition. The last paragraph: “the key lesson here is that we need to be very careful about how much we read into news headlines about market gurus. It’s very easy to get swept up in the idea that a wealthy investor knows more than the rest of us and that we should follow their disclosed moves as reported and after the fact. The financial media loves to use big names to grab headlines and page views. But in many cases you’re not getting the full story about what this investor is doing. And following their supposed positioning could lead to bad decisions and unnecessarily poor performance.”

And then Josh Brown weighed in with something softer and different – What you’re not hearing about George Soros today. Josh points out the obvious: ” … he can, at a whim, change his mind, change the directional leaning of his trades and even completely rework his portfolio to bet the other way.” Soros might have changed his mind already. He is after all very directional. File this in the drawer of what makes news, it is somebody important, it does not mean that he is right! If he was right all the time on his big calls, he would be “worth” (as a measure of rightness) more than Buffet, Gates and co. put together.


 

Linkfest, lap it up

Last week we had what market commentators called a bad jobs number due to there only being a couple thousand jobs added to the US economy. The JOLTS number that came out this week showed that the number of job openings are on the rise – It’s never taken longer for US businesses to fill a job opening. Either this is due to people having the incorrect skill sets to fill the open jobs or it is due to employers not wanting to pay enough as the job market reaches full employment. I tend to think it is the latter, which shows strength in the US market.

An interesting look at immigration patterns. I think this map highlights how we are becoming more of a global village each year – 2nd Largest Nationality Living In Each European Country

For those of you who wrote CFA last weekend. It seems that clear benefits of having the designation were hard to find when Bloomberg did some research, they don’t say how many people formed part of their research though – The CFA Exam’s Toughest Question: What’s the Payoff?


 

Home again, home again, jiggety-jog. Markets are a little lower to start with. Stand by for hundreds of headlines about the Fed, their meeting is soon. Will they pass, hint at X or Y or Z, that is what is going to be the focus. Get used to it, the Fed meets every 45 days after all!


Sent to you by Sasha, Byron and Michael on behalf of team Vestact.

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