Largest shareholder stake sale
? Tencent’s largest shareholder, Prosus, announced an open-ended sharebuyback program for Prosus and Naspers, with the funding from selling holdings in Tencent.
? Shares of Tencent reacted negatively after the announcement.
? Offloading investment seems to be the trend for TMT names to realize gains.
? The Prosus plan may cap Tencent’s near-term performance. But we believe the news is fully digested.
What’s new?
? Prosus and Naspers announced a long-term share-repurchase program of the shares of Naspers and Prosus. The program is designed to increase the NAV per share, taking advantage of both Prosus’s and Nasper’s trading discounts to their underlying net asset value. The repurchase program is open-ended and will run as long as elevated levels of the trading discount to the Group’s underlying net asset value persist. The Prosus repurchase program will be funded by an orderly, on-market sale of its holdings in
Tencent. The number of Tencent shares that will be sold on a daily basis will represent a small percentage of average daily trading volume of Tencent shares. According to the Prosus release, Tencent is supportive of the withdrawal by Prosus of its voluntary restriction on the sale of its Tencent Shares. The boards of both Naspers and Prosus stated that they have great confidence in Tencent’s long-term prospects. Prosus hasn’t announced the number of Tencent shares it will sell. According to Prosus, for example, had the Company executed the repurchase program over the past three months within European regulatory limits, the resulting number of Tencent shares that would have been sold on a daily basis would have been, on average, not more than 3% to 5% of the average daily traded volume. Shares of Tencent reacted negatively after the announcement.
Our view
? The Prosus plan may cap Tencent’s near-term performance, as the offloading by a major shareholder is expected to dampen sentiment on Tencent (Prosus also broke the commitment it made last year). But we believe the news is fully digested. Prosus’s sales of Tencent shares is also subject to various factors, such as market conditions and the NAV discount. We still hold a constructive view on Tencent, as we believe that its investments will translate into future growth and that the recent messages from the Chinese government are turning more positive for the sector. We currently have an ADD rating for Tencent with a DCF-based target price of HK$440.6. Near-term catalysts are the normalization of government policy and a pick-up in the revenue growth rate.