Meryl Pick discusses falling Naspers/Prosus shares on the Money Show this week

Portfolio Manager, Meryl Pick, discusses a weaker market yesterday, driven largely by the fall of Naspers and Prosus shares following the news of Chinese president Xi Jinping’s re-election this week.

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Transcript

The Money Show  00:08

Well, the local market's down 1% ahead of market close and closing weaker today. The key factor that is Naspers and Prosus both being down 15%, as those shares took a hit, as China's election results showed that Xi Jinping retained his seat of power. Naspers and its international subsidiary have been battered over the past year due to China's crackdown on tech firms. Both are heavily exposed, of course, to China's tech firm Tencent. To break down the markets, we're speaking now to Meryl Pick, a Portfolio Manager at Old Mutual Investment Group. Meryl, Naspers and Prosus can't get out of China fast enough.

Meryl Pick  00:49

Good evening, and good evening to your listeners. What an exciting day on the JSE. It's not every day that you see the biggest share in the market fall, Prosus down 15%, Naspers down 17%. I suppose it was clear that that would be the direction of the day. Before markets opened, Tencent was down eight, and I think it closed at about... down 11 and a half. And this all off no company news, but falling along with many other Chinese counters, and particularly tech counters today. So, you know, we looked at the world in terms of themes and price. And for some time, we've had a negative theme on a headwind for Tencent in the form of regulations tightening around the tech sector. So, there's been some specific regulations around gaming, regulating the content of gaming, the frequency of games being released, and trying to reduce the amount of time that minors spend on gaming. But about a year ago, or 18 months ago, we saw a general policy start to emerge called "common prosperity", kind of championed by Xi Jinping. And I think today, the markets' concerns are that the top leadership within the party is being replaced with less market-friendly and more sort of common prosperity aligned allies of Xi Jinping. And I think the tech sector has some monopolistic characteristics, network effects, which are great business models, but have led to monopolies. So, our thesis for some time has been that these monopolies would come under threat, and that the growth profile for Tencent would not get back to the heights that we've seen in the past. That being said, at the levels and with the price action that we've seen today, it is starting to get down to very interesting levels. And I think, you know, at this point, it might be presenting a much more fair entry point into still a reasonably solid company that just might not grow at the levels we've seen in the past.

The Money Show  03:14

What will this mean, then for the local market, because Naspers, and Prosus some of the heavier players in terms of volumes, and you know, the valuations of the companies?

Meryl Pick  03:28

Ja, well, it's a big... I would venture to say it's probably a big share in most people's pension funds, in most people's investments, because it is just such a large part of the market. So, you know, on a day like today, in absolute terms South African investors have lost out. I think all that one can do on these occasions is to keep on, not panic, and investigate the underlying fundamentals. So, you know, what is the company actually worth in the long term, are there cash flows that are being generated, what does the balance sheet look like, etc. I think within the Tencent context, this company should still deliver reasonable growth, 10-15%, it does generate cash. It has a large market share in gaming, for example, in social media within China. It's just that newer growth avenues such as payments or cloud computing, it might not be allowed to reach the same levels of high market share that it's got. So, the growth prospects have certainly diminished. But at a - you know, the company still operates well and generates cash. And through Naspers, you have an entry point into that company. Of course, we also know that Naspers is made up of more than Tencent. There are other companies functioning, it's walked away recently from this BillDesk deal, which means it's got more cash available for its share buyback programme, which it's said it will do for the next 12 months to underpin the price. So, there are... it's not a complete loss. And I would say on a day like this, one should look at whether this is not a point to reevaluate the investment case.

The Money Show  05:19

Well, I hope so, because the JSE taking quite a big slap for both those companies. But I saw MTN down 6% and also Telkom down 3%. Would that be still off the back of the falling out in terms of the merger talks we saw last week?

Meryl Pick  05:35

Ja, I mean, it's possible. Look, I think when these talks are rumored or are sticklered on or even commented on by the companies, we see some of that good news starting to get priced into shares, you know, people evaluating what the synergy would add to either company. So, if that has been a thesis that investors have backed, then obviously, it's starting to falter. That's certainly one reason why the share price could take a knock. Look, I think, trying to figure out volatility on the day in the absence of specific news is always quite difficult. And I would encourage people to look at longer term themes. 

The Money Show  06:16

And the Rand weakening against all major currencies, 18.43 against the dollar, 20.83 against the pound. 18.23 to the euro. A lot of headwinds, including the midterm budget coming the Rand's way this week, how do you see the local currency performing?

Meryl Pick  06:29

Ja, I think a lot of that will ultimately be determined by the direction of the dollar. I think the Rand, yes, it's 18.43. But almost every currency this year has weakened against the dollar. If you take a year-to-date picture, the Rand is not the only currency that's weakened to this extent. And yes, there might be in the week, on the day, news flows around budgets, etc. that might move the price slightly. But the broader term theme is certainly the strength of the dollar. So, I think we'd be looking for signs of weakness, a slowdown in the US economy. And eventually a slowdown in the pace of rate hikes. If you look at our inflation differential versus the US, we actually have a lower inflation rate, our interest rate differential is not as big as it used to be either. So, the reasons for the dollar strength eventually we think will turn.

The Money Show  07:29

Alright, that was Meryl Pick, Portfolio Manager at Old Mutual Investment, giving us the breakdown of the markets. Of course, shares of Chinese tech giants Alibaba and Tencent closed down more than 11%. On the local market, they dragged down the likes of Naspers and its international subsidiary Prosus, Prosus down 15% with Naspers down 17%. And that's why we saw the All Share down more than 1% today. A lot of weakness on the local market, beginning off on Monday. After that, we'll be having that breaking down of the midterm budget on Wednesday with Professor Raymond Parsons but before that, more headlines now with that.