As a South African investor you have a stake in Naspers or Prosus on some level. Naspers constitutes a 17% weighting in the Top 40 index and 80% of what happens in Naspers is linked to Tencent, the Chinese tech giant. Last week we saw Tencent drop 17% at one stage before recovering somewhat. Naspers followed suit and so did Prosus. It was painful to watch this South African stalwart being knocked down by the actions of Chinese regulators and once again the risk of investing in Chinese companies came to the fore.
The emotional rhetoric on social media was that you cannot trust the communist Chinese government and you only have to look at the human rights abuses and impromptu crackdown on business to see why. But if we just take a step back and take our emotions out of it, we might see the other side of the coin. There is no doubt that it is much easier for a one-party state to change the rules very quickly and one has to accept that the common good may be more important than the profitability of the few. If you listen to the people in the know, you realize that the explosion of the internet over the last twenty years which made companies like Tencent, Alibaba, Baidu and JD.com massively powerful in China, created an environment where these companies could manipulate their users and clients in a way that made competitive behaviour redundant. As a matter of fact, the regulators in China had been non-existent until a few years ago and what these internet companies have been getting away with would never have been allowed in Europe or even the USA.
But now the regulators are catching up and they want the playing fields leveled between the companies, consumers and geographical areas. Of course there is the paranoia regarding state security and all that, but all governments are paranoid about state security and will implement regulations to control potential information flow.
But, bringing it back to Tencent, this company remains a dominant player in the Chinese and world technology sector and if anything, this massive drop in price was a buying opportunity. Naspers still trades at a 50% discount to its net asset value, and Prosus at around 36%. What we can take away from this is the fact that investing in Chinese companies does come with additional risk, just like investing in SA companies, but the rewards can be stellar. The prudent way to go about this is, once again, not to bet all your money on one horse, but to spread your risk among different companies.