Tencent in their own league, legends

Revenues grew 52% year-on-year (6.048 billion Dollars for the quarter, this is a real big business), operating profits increased 40% year-on-year when compared to the prior third quarter (2015). Profits increased by 42% year-on-year to 1.614 billion Dollars, there was slippage with operating margins from 39 to 36%.”


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To market to market to buy a fat pig The All Share index here in Jozi ended 5 points above 50 thousand points, up comfortably over a % on the day. The Rand to the major currencies seems to be leveling off at and around the current levels, stocks seem to have found something to hang onto equally. Equity returns as a collective (i.e. the index) have been tough going, the overall market is up only ten % in three whole years. Ten years, it looks like a more respectable 112 % return, that also does not give you the benefit of dividends, and if you have reinvested them. Throw that into the mix and of course the returns are juiced up significantly.

Over a year, the last 12 months, equity markets (the All share index) are down over three %. And notwithstanding all the ructions and political “mischief” as the finance minister calls it, the Rand is about flat from this time last year. So our return in Dollar terms, for our market over the last year is also the same, down three %. To the Pound Sterling over 12 months as a result of the shocks of Brexit, we are nearly one-fifth stronger. Which is excellent for imported inflation, provided you are importing from the UK, not so much for the equity returns of businesses domiciled in that part of the world. I guess it is not really surprising to learn that the Euro to the Rand is also flat over the last twelve months, seeing as the Euro/Dollar rate has been “steady”.

As an old friend of the newsletter said: “Currency fluctuations make comparisons between jurisdictions difficult. To eliminate this problem, what do you think of all investment performances of any instrument (stock, bond, portfolio etc.) being compared to the S+P 500 Index at the accounting date and over the accounting period, with the currency in which the instrument is quoted being reduced or increased to its USD value at the date of evaluation and over the period being examined?”

Yeah, I think he is right. If as an investor you benchmark yourself against a single currency over an extended period of time, and then compare yourself to the largest market in the world, that is about as close a comparison as you can get. Equally ….. if you wanted to measure yourself against the Dollar return risk free rate, then the good old fashioned 10 year US treasury rate would be a good idea. So you can see whether or not you are being compensated or not for the relative risk you are assuming.

Over the seas and far away in New York, New York, stocks finished mixed, all the stocks that were going up last week lost ground, and the opposite is also true. The nerds of NASDAQ gained a little over one-third of a %, led by the likes of Apple (up two and two-thirds) and Microsoft (up one and one third of a %), whilst in the losers column, sent the S&P 500 down 0.16 % and the Dow Industrials ended off nearly three-tenths, was JP Morgan (down nearly two and a half %) and Wells Fargo, which sank nearly one and three-quarters.

Big energy also fell, on a day that the International Energy Agency (IEA) made some pretty long range predictions. They were streaming the presentation live on Facebook, and I guess when I “checked in” there were less than 50 eyeballs at that time. I suppose celebrity X was a lot more exciting than the outlook for energy. Which is something we use all of the time. Each and every day. Sigh ….. If you want to check it out, the presentation fly through, here it is – World Energy Outlook 2016

According to them, we are going to continue to use all energy sources, old and new, just more of renewables (new). The biggest demand change over the next two and a half decades (in their opinion) is petrochemicals and aviation, as well as freight. Sounds like major urbanization and globalization to me, have these people not seen the latest elections and referendums? I suspect that these long dated predictions are to help energy companies adjust for the demand, oil/gas/coal projects take years to build and bring on stream. If the price is not right, the price simply is not right, that crystal ball on prices rolled down a deep pit a long time ago.

There was (for oil prices) the more important meeting of OPEC, where the organization was ready for a freeze in production (again). Helpful for oil prices. Not helpful for oil prices was that US stockpiles rose. Care to call oil prices? I thought not. No wonder the commodity cycles are so vicious. Can’t call it, won’t call it.


Company corner

Tencent released numbers yesterday, you will recall that we teed you up with the WSJ article that included analyst expectations. It is one of my least favorite things (forecasting to the decimal point), humans however like an element of control in “all things” and tend to have all sorts of weird phobias associated with the things that we can’t control. Spiders to flying, to the dark and so on, we all have different ways of avoiding or dealing with our fears. Anyhows, Naspers, at the turn of the last millennium invested in a small Chinese internet company called Tencent, the rest as they say is history. I wonder if it really was one of the best deals of all time, it may well be.

Let us shift gears and look at these numbers quickly, we can do a deep dive when the company reports full year numbers in three months. These are for the 3Q to end 30 September, and are available for download here – Tencent announces 2016 third quarter results. For our purposes we almost always have to convert to Dollars and then back to Rand. The company is primarily a Chinese mainland business and they report revenues and profits in Renminbi (Chinese Yuan), whilst their listed price is in Hong Kong, quoted in Hong Kong Dollars obviously.

Revenues grew 52% year-on-year (6.048 billion Dollars for the quarter, this is a real big business), operating profits increased 40% year-on-year when compared to the prior third quarter (2015). Profits increased by 42% year-on-year to 1.614 billion Dollars, there was slippage with operating margins from 39 to 36%. Basic EPS clocked 1.251 Renminbi. And this is where you have to start working backwards to get the valuations and then also, most importantly for us, to see what it means for our Naspers shares. Covert Renminbi to Hong Kong Dollars at a rate of 1.14, you get to 1.43 HKD of earnings. The share price, for the record, trades at 194.1 HKD. The stock trades on a rolling twelve month multiple in the mid thirties. Growing at these rates, that is a more than acceptable valuation.

We will do a more detailed analysis later on, for now, let us see the value of what Naspers holds. As of the last annual report, MIH, a subsidiary of Naspers, owns 3,151,201,900 shares or 33.51 % of Tencent. At the prevailing share price (above) that equates to 611.65 billion Hong Kong Dollars. At the current HKD/ZAR exchange rate (1.84) that equals 1.126 trillion Rand. What? Naspers closed up nearly three % yesterday, the market capitalization is equal to 933 billion Rand as of last evening.

Before you scratch you head wondering if this simple math is completely flawed, remember that Naspers has multiple other businesses, some of which they have been selling and freeing up significant pots of money (still pending), other businesses that they are funding aggressively that still require pots of cash in order to “succeed”. All their ecommerce platforms. Not all are equal of course, there is recent talk that Naspers may sell some of their Middle East business, Souq.com to Amazon.com. Jeff Bezos, according to sources, was in Dubai last week. When I say Naspers’ business, there are other equity holders (including Tiger Global) and a dilution (i.e. an investment by Amazon along side Naspers) may be what happens here. Nice to partner with that crowd, right?

In short, do nothing with your Naspers shares, hold them on the basis that the entertainment business in China is flourishing. That is what Tencent through their platforms are. Many may snigger at the types of entertainment that younger people take part in, perhaps when radio first became a household entertainment theme, people bemoaned the fact that they didn’t see each other any more and that the art of story telling would die. YouTube, online gaming, all sorts of different communication methods are just that. In fact, in a world with Facebook and Instagram and WhatsApp, I think that I communicate more now with the people around me that at any other point. That includes family and colleagues. There is more that is sharable now than at any other point in history. The quality is what matters.

In closing, the various EPS outlooks (there go those forecasts again) that I have seen peg Tencent earning 7.5 Hong Kong Dollars next year. That means that the stock trades forward on around 26-27 times earnings. So much for being wildly expensive, right? We continue to accumulate Naspers, with the share price having been pretty static over the last 12 months. This lull represents a big opportunity at many levels.


Linkfest, lap it up

This blog piece is more about trading than investing but the story told is where Druckenmiller (has one of the best track records out there) says one thing and then a couple months later goes and does the total opposite. The point is don’t make investment decisions based on what someone on TV says, you don’t know their time frames or the reasons for their trade/ investment – You Are Not Stanley Druckenmiller. More importantly you don’t know when they change their mind. Another story is where Druckenmiller went very long (used leverage) the day before the 1987 crash, then during the crash realized he was wrong, did a 180 and ended the day with a profit. Imagine that you went long with him the day before the crash and then blew up on Black Monday because you didn’t know he changed his mind?

Underperformance is a given when dealing with equities, it is how you deal with the underperformance that matters for long term returns. Stock markets will go down during periods and investment managers will underperform some years, part of the risk you assume to try outperform – Outperforming by Underperforming. The blog makes the point that if Buffett ran a fund, he probably would have been fired many times in his career due to underperformance.

Amazon launches one of their most anticipated shows this weekend. They have spent over 160 million Pounds on the production of the show so the hope is that the show draws millions of new subscriptions to Amazon prime – Amazon to stream The Grand Tour in 200 countries. Grand Tour is the new show that Jeremy Clarkson, James May and Richard Hammond are doing after they left Top Gear.


Home again, home again, jiggety-jog. Asian markets are mostly in the red this morning and Tencent is down just over a percent in Hong Kong, so expect Naspers and our market to open in the red this morning. The big data points for the day are, UK retail sales (is Brexit uncertainty starting to take a toll on the economy), Europe CPI, US CPI and initial jobless claims. The CPI figures and jobless claims will give the market a better indication of what central banks are likely to do next, for the FED the market has priced in a 90% chance of a rate hike in December.


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

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