Tencent’s low input weighs down Naspers profit

Admire Moyo
By Admire Moyo, ITWeb's news editor.
Johannesburg, 23 Nov 2022
Bob van Dijk, group CEO of Naspers and Prosus.
Bob van Dijk, group CEO of Naspers and Prosus.

While Naspers reported strong e-commerce growth, group profit was negatively impacted by China-based Tencent’s lower contribution.

This emerged when the South African-based internet giant today announced its interim financial results.

In 2001, Naspers made an early investment in Chinese technology firm Tencent and became increasingly focused on the global consumer internet sector.

The JSE-listed Naspers and its Amsterdam-listed Prosus unit in June announced an open-ended programme to buy back their shares, funded by the gradual sale of their holding in Chinese internet giant Tencent.

Prosus, which is 73%-owned by Naspers, holds a 28.9% stake in Tencent. The stake is valued at about $128 billion (R2.2 trillion).

Earlier this month, there were reports that Naspers was looking to sell its stake in Tencent to Chinese state-owned group CITIC.

This, after Asian Tech Press reported that a CITIC-led consortium was in talks with Naspers to buy all of its Tencent shares, according to “sources”.

However, Naspers rubbished the report, saying it was “speculative and untrue”.

Solid e-commerce returns

In the interim results, Naspers says group trading profit declined by 38% to $1.4 billion, reflecting a lower contribution from Tencent and investment in e-commerce extensions.

Tencent announced on 16 November that it will distribute shares in Chinese meal delivery giant Meituan to its shareholders next year. “Upon receipt of the shares, we will consider them as held for sale,” says Naspers.

Besides the lower Tencent contribution, Naspers says e-commerce revenue is up 38%, driven by a strong operating performance across all four core segments.

Says the firm in a statement: “Despite a turbulent period during which industry growth expectations and valuations came under significant pressure, we have increased e-commerce revenues and continued organic investment into those segments where we see the highest growth potential.”

According to the company, this investment is focused on building and extending its offering within core products to meet local market needs, notably within autos at OLX, convenience delivery in food and credit at PayU.

Organic investment levels peaked during the period, and together with increased scale and actively managing the cost base, the business is well-positioned for improvements in profitability and cash flow generation, it adds.

“It is our ambition for our consolidated e-commerce portfolio to become profitable in H1 of FY2025. Our buyback programme will continue for the foreseeable future, as it meaningfully improves net asset value per share, creating permanent value that will compound over time.”

Says Bob van Dijk, group CEO of Naspers and Prosus: “We have shown strong execution and operational growth through a volatile and challenging time. To further scale our e-commerce businesses, we have made significant organic investment in OLX Autos, credit, convenience delivery and edtech, which will drive sustainable long-term value creation for the group. The group’s open-ended buyback of Prosus and Naspers shares is unlocking real value.

“We expect the benefits of the programme to compound over time. Looking ahead, we will work towards simplifying the group’s structure and to crystallise value from our portfolio.”

Basil Sgourdos, group CFO of Naspers and Prosus, comments: “Revenue grew strongly across our segments, despite the significant foreign currency headwinds in emerging markets and a lower contribution from Tencent. Our e-commerce businesses are all profitable or breakeven at the core and we have accelerated efforts to drive profitable growth.

“We expect HY23 to mark our peak investment spend, with profitability and cash flow generation improving from here on, with our ambition to be profitable on aggregate in H1 FY2025. Our strong balance sheet and significant liquidity is a key advantage in the current climate; we will remain disciplined on M&A [mergers and acquisitions] and committed to maintaining our investment grade rating.”

Cash considerations

The company explains that e-commerce revenues, on an economic interest basis, grew 38% to $5.6 billion, driven by strong top-line growth across all four core segments.

Trading losses, reported on the same basis, expanded to $1 billion. On a consolidated basis, e-commerce revenue grew 30%, to $3.6 billion, while trading losses widened to $462 million, it adds.

“The cash needs of our business are only in relation to our consolidated businesses, and the losses of our associates are prefunded and do not impact our cash position,” says Naspers.

It notes that profitability was impacted by continued investment in adjacent growth opportunities: autos transactions in classifieds, a broader on-demand grocery delivery ecosystem in iFood, credit in payments and fintech, as well as the expansion of the firm’s edtech segment.

“Our core classifieds business, as well as iFood’s restaurant delivery business in Brazil, remain profitable.

“We expect HY23 to represent the high watermark in terms of trading losses, with profitability improving materially from this point on, as the benefits of our investment programme and cost reduction initiatives take hold.”