Tencent Holdings Limited - too expensive

Nov. 23, 2011 - PRLog -- Google is a multinational Internet search engine, which generates profit primarily from advertising. Back in 2006, Google set up the Chinese version of the website, based in mainland China, where it had originally agreed to self-censor its search results. About two months ago, Google announced that it would no longer agree to abide by Beijing’s censorship rules even if that meant shutting down its Google.cn site. Google said this week that it had stopped censoring search results for news, images and other information and would redirect its China-based website to Hong Kong, which although part of China, is governed by a different and more liberal set of laws, established when it was still a British colony. Search results, however, with sensitive information that was not accessible before is still being blocked by the Chinese government. There is speculation that Google will soon announce the closure of its China-based internet portal, which could have implications for a South African media company.

Tencent Holdings Limited is the operator of an instant messaging platform in China called QQ, which subsequently developed into the leading business of its kind in China.
Tencent has grown into one of China's largest and most used Internet service portals. In May 2001, Naspers, a multinational media group, acquired a 46.5% interest in Tencent Holdings. For the interim period to September 2009, Naspers recorded a sound set of results with revenue up by 6% driven mainly by the internet and pay-television segments.  Naspers’ Internet division, consisting mostly of Tencent and the Russian Mail.ru., contributed 23% to group revenue and 27% to EBITDA. The resultant EBITDA margin increased from 28% to 31%. In line with this, operating profit improved by 28% and translated into a higher operating margin of 27% (2008: 23%). Tencent was the main profit driver within this Internet segment, which accounted for most of the revenue and operating profit. Profit after tax increased by 31% as a result of a higher effective tax rate at 28%. Fully diluted core headline EPS increased by 35% and in line with the group's policy, no interim dividend was declared. Cash generation, however, was healthy for the period under review.  

Naspers has high margins, a good ROE and its core operations are very cash generative. Naspers is a solid company with a lot of growth potential, primarily through its technology investments in emerging markets. While the growth rates in these investments are high; it also has an above average risk profile. Given the nature of many of the group's businesses, gauging a sustainable growth accurately is challenging, but we feel the group is well positioned in a number of exciting high growth sectors. Its investment in Tencent (listed on the Hang Seng) alone is worth around 80% of the current Naspers share price. Accordingly, we remind investors that a significant portion of our valuation is dependent on Tencent's performance on the Hang Seng and a stable exchange rate. We do however feel that Naspers’s valuation seems stretched at current levels and would recommend short term investors to sell their shares.

From technical point of view, the share price of Naspers is trading above its moving averages and the trend remains bullish. The share price is also very overbought and should start pulling back soon on profit taking.

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