INVESTMENT CASE
SEEING THE BIGGER PICTURE: DISSECTING NASPERS
PHILIP SHORT | NASPERS ANALYST AND PORTFOLIO MANAGER OF THE OLD MUTUAL TOP 20 FUND
ABOUT THE AUTHOR Philip is responsible for covering a number of companies within the industrial sector, primarily telecommunications, media and healthcare. Prior to joining Old Mutual Equities in 2012, Philip was a hedge fund manager and analyst at Fairtree Capital.
Naspers has long been the darling of South African investors, What's WeChat? having delivered a total return to investors of 36% a year over the past 10 years – that’s a cumulative return of more than WeChat is a smartphone application that consists of: 2000%! There are concerns about whether there is further value in the share and how sustainable this growth path is
going forward. We believe there is and the answer lies in Movie Ticket Bill Payment Free Calling Investment Social Network understanding the two key parts of the business: Tencent and the “Rump”. TENCENT Tencent is the main driver of the Naspers investment case. Mobile Payment User Review Group Buying Taxi Order Free Messaging It is the dominant internet company in China and offers its one billion users an array of services. Tencent is effectively the Facebook, WhatsApp, Twitter, Instagram and YouTube A TYPICAL DAY FOR A WECHAT USER of China, all rolled into one company. It is also an innovator, 07:00 08:30 10:00 12:45 18:00 22:00 and has either grown or invested in the complete spectrum Wake Up Arrive Near Work Break After-Lunch Go Home Before Browse Office Browse Moments, Break After Work Sleeping of internet and entertainment companies as we currently know Moments Pay for breakfast send and receive Shop using JD, Pay for groceries Chat with with WeChat messages chat with friends and for dinner friends, grab it. Its strongest asset is WeChat, which has an incredibly strong Pay in group chat using WeChat Pay Lucky Money
moat (or competitive advantage) and network effect. WeChat 07:45 09:00 12:00 17:00 20:00 provides its one billion daily users an all-in-one application Leave for Start Work Lunch Time Getting Off Watch TV Work Read unread Open Lucky Money Work Read articles, browse with messaging, gaming and a wide range of commerce and Read two group chats and pay for lunch Browse Moments Moments, play games, articles, play shop using JD payment services. Tencent’s mobile users spend a combined two games 1.5 billion hours on its platforms per day, equivalent to 90 minutes per user per day, equal to total time spent on all other sites and platforms combined!
6 Public Paying for goods and services on your mobile is a big thing Profitable Play to in China. In 2017, almost US$16 trillion worth of payments win Value Operate for appreciation return & cash Proven were processed over mobiles, more than three times the Scale to full potential & profitability amount of 2016. WeChat alone processed US$6 trillion Committed investment of this. As you can see from the chart below, this business Potential hardly existed a few years ago but now has the potential to Experiment & be Tencent’s biggest revenue contributor in the medium term. expand This speaks to digital platforms, networks and scale.
Although it has shown tremendous growth over the past 15 years, the fact that it has entered new, nascent industries 5+ years away 3-5 years away from full potential Cash generative with huge growth potential and possesses an existing network, CHINA MOBILE PAYMENT VOLUME means we maintain a positive view on the company in the QUICK LOOK: CLASSIFIEDS – AVITO medium term given its undemanding valuation. T Classifieds is an online marketplace where buyers and sellers meet (think Gumtree in South Africa). Naspers's classifieds businesses provide digital marketplaces that connect more than CHINA MOBILE CHINA MOBILE TPAYMENTCHINA MOBILE PAVOLUMEYMENT VOLUME PAYMENT SHARE 300 million buyers and sellers in more than 40 countries around $16T the world. Their companies, OLX, Avito and Letgo, have the Other Up 3.2x number one mobile classifieds app in more than 20 countries. $12T T WeChat 8% Pay $8T Avito Revenue,Revenue, RUBmn RUBmn
M P V M P V 18,000 T 38% 54% AliPay Mobile Payment Volume, China Mobile Payment Volume, $4T 16,000 +32% 14,000
$0 2012 2013 2014 2015 2016 2017 12,000
Source: Analysis (Q1:18, 3/18). *Excludes certain P2P & transfer payments. Assumes constant USD/RMB rate = 6.9. 10,000
S A E P P A USD RM 8,000
6,000
THE REST OF NASPERS (aka THE RUMP) 4,000 2,000 Naspers is aiming to replicate the model that has been 0 successful for them in the past, where they get to a dominant 2012 2013 2014 2015 2016 2017 position in the market by building scale and then monetise the Source: Company data Source: Company data asset. These assets are currently at various stages of the business Avito EBITDA cycle. Adj. EBITDA, RUBmn Adj. EBITDA, margin, %
Outside of Tencent, Naspers has invested in numerous other 10,000 100%
57% 58% businesses at various stages of their development, which can 53% 54% 8,000 51% 49% 50% be grouped into the following broad categories: 28%
6,000 • Global classifieds: OLX, vito,A Letgo 0% • Food delivery: Delivery Hero, Swiggy and iFood 4,000 -50%
• Online retail (eTail): Flipkart, takealot and eMAG 2,000 • Video entertainment: MultiChoice -100% 0 -118% As the majority of these assets are not yet profitable, we believe -2,000 -150% the market is missing the significant value that can be added via 3Q17 4Q17 2013 2014 2015 2016 2017 Source: Company data its diverse portfolio of assets, as the following graphic highlights. Source: Company data Avito is the number one classifieds business in Russia, which Total orders per cohort and year - the majority of Delivery Hero’s orders are from existing cohorts, Naspers acquired in 2013. The company went from making and each year, the size of new cohorts grows zero profit in 2013, to a profit of RUB9bn in 2017 (equivalent Orders from to US$143m). So how did it achieve this? 2016 Cohort
Increasing When it comes to classifieds, the investment case is to be First-time Customer Orders from Base dominant in order to monetise users and use the network effect 2015 Cohort to drive user “stickiness”, which enables reduced marketing Orders from spend. This is evident in Avito’s numbers below. Following 2014 Cohort High Orders from Returning the merger of Slando and Avito in 2013, Avito’s revenue Orders from 2013 Cohort Customer 2012 Cohort accelerated from RUB2.4bn in 2013, to RUB15.5bn in Base
Orders from 2011 2017, while at the same time EBITDA (Earnings Before 2010 Earlier Cohorts 2009 2008 Interest, Taxes, Depreciation and Amortisation) grew from Before 2008 2012 2013 2014 2015 2016 less than zero to RUB9bn. Source: Delivery Hero disclosure. (1) ‘Cohort’ refers to customers grouped by the calendar month in which they first placed an order with Delivery Hero (including Foodpanda, acquired in 2016) QUICK LOOK: FOOD DELIVERY – Source: Company data DELIVERY HERO Delivery Hero is a leading global takeaway restaurant KEY DELIVERABLES NEEDED TO UNLOCK aggregator (think Mr Delivery in South Africa). It operates VALUE Tencent: in more than 40 countries across five continents. This is the “eating out” of the future; the preference among millennials • They have to maintain their number one gaming position in China. living in high density cities, which makes this model relevant. • Globally, advertising has shifted from traditional platforms, What is so appealing about Delivery Hero? such as print and TV, to digital, such as the internet. • It is operating in high growth markets. There is a Tencent’s platforms occupy a large amount of the time Chinese nationals spend on digital platforms. As the shift growing trend towards online ordering and delivery from traditional to digital continues, Tencent must continue (i.e. the market currently has low penetration) and, given to grow its share of advertising revenue in this space. that it’s operating in emerging markets, we anticipate a • Tencent has, in recent years, grown its market share in the faster growth profile relative to its developed market peers bourgeoning mobile payments space from 20% to almost (Just Eat and Takeaway.com). The prevalence of technology 40%. As mentioned, this is a phenomenal growth story with via smartphones enables greater convenience, range of the true economic impact yet to reflect encent’sT bottom line. menus and a means of payment. This is in line with Tencent’s general business philosophy: engage the user, connect them to the network, plug them • The business model is attractive. Low capital intensity into the Tencent ecosystem, and then monetise. and the strong network effect drive pricing power. Naspers rump: • It has a high returning customer base. The graph that • Classifieds: Grow dominance in more geographies follows highlights the accretive effect of new customers on and then monetise the user base. OLX has just recently moved into a profitable position and we would like to see the order volumes of Delivery Hero. The number of first-time this continue. With Letgo, they need to ensure that they orders grows each year, and those first-time customers dominate the US market, either through organic growth via return in future years and order more. Orders for 2016 better execution or to acquire competitor OfferUp to take point to an ever-increasing customer base, with orders the market outright. This will allow Letgo to gradually drop from new clients in 2016 exceeding all orders from clients marketing expenses, monetise the asset base and make the signed up from 2008 to 2012. business profitable sooner. OLX Group Revenue (US$m) • We regularly engage with management in order
46% (43%) to emphasise the importance of unlocking value in the group. This includes meeting with the Remuneration 624 Committee to understand and give input into how management are incentivised and aligned to shareholders. • Naspers management has a great track record of value 426 creation. Naspers recently sold their stake in India-based Flipkart to Walmart for US$2.2bn; a significant return on High their investment of US$600 million six years ago. Returning 266 Customer Base • As part of our process, we calculate a bull, base and bear scenario for each share. The valuation of our bear-case scenario, which incorporates more conservative assumptions than our base-case scenario, provides us with significant FY16 FY17 FY18 comfort around the investment case. At current levels, even Source: Naspers our bear case for Naspers shows meaningful upside to the OLX Group trading profit/(loss) (US$m) current share price.
181% (156%) Naspers Return (US$m)
63
(192) (78)
3.6x
2 200
FY16 FY17 FY18
Source: Naspers *Numbers in brackets represent local currency moves
• Stabilise sub-Saharan pay TV: The last few years have not 616 been kind to African countries due to weak macroeconomic conditions and currency depreciations. Naspers will need to tailor its offerings to make its products more commercial, Investment Exit value
a process it has already begun. Source: Company data • Online food delivery: This business segment is still in its infancy and will require patience and further investment. CONCLUSION We can already see great traction in this segment with While Naspers has many detractors and critics who point iFood and Delivery Hero breaking even in 2018. to its high price-earnings (PE) ratio, a tech bubble or Naspers WHY ARE WE CONFIDENT OF THIS being a one-trick pony, we have done extensive research in VALUE? order to understand the entire business and the main drivers • Management have a strong track record of maximising that look set to unlock value. We believe that holding this share returns from their investments, achieving an internal rate of return (IRR) of close to 20% on the US$8.5 billion invested in our clients’ portfolios will lead to outperformance in the long to date since 2008 (i.e. excluding Tencent), and with only term. We will be maintaining our current overweight position US$0.9 billion of that investment written off to date. and will add opportunistically into the future.