It’s hard to believe now that between February 2000 and October 2001, the Naspers share price fell from R96 to less than R15. This did include the 2001 market crash, but the counter was in decline well before that.

At that point, nobody would have predicted that the former print media company would become the largest and most important listed company in South Africa. Despite the success of its pay-television business, Naspers did not have an obvious path for growth.

Yet the company now dominates the JSE to such an extent that its market cap makes up nearly a fifth of the entire FTSE/JSE All Share Index. It has also been one of the most reliable counters on the market.

“Naspers is a classic example of a business that has been able to evolve as economies have changed,” says Hannes van den Berg, co-portfolio manager of the Investec Equity Fund. “It used to be a print media business that went into television with M-Net. Then, through some great insight or luck, it saw an opportunity in China and got into Tencent, which now dominates its earnings profile. Now it’s at the dawn of a fourth stage of evolution, which is its e-commerce business.”

It was in 2001 that the Tencent transaction definitively changed the nature of the company.

“Naspers’s investment performance has been driven by the exceptional value creation from its investment in Tencent, which is widely considered to be one of the best venture capital deal pay-offs ever,” says Hlelo Giyose, chief investment officer at First Avenue Investment Management. “It is hard to believe that in 2007 only 11% of company revenue was from Internet businesses, whereas this is more than 80% today.”

Seven-fold

Giyose points out that Tencent is one of the few businesses in the world that has grown its earnings per share more than seven-fold over the past decade.

“The market prices of both Tencent and Naspers have followed the consistent compound growth in earnings,” he says.

The Tencent transaction is the most compelling example of what Naspers has done so well: identify trends and changes in trends, and follow these with good management discipline.

“Naspers’s success has been driven by a disciplined approach of investing in early stage, disruptive platform businesses within high-growth markets,” Giyose says. “Management discipline is imperative at the embryonic stage as such ventures may generate many years of losses as they develop, and it is critical to know when to give up or scale up such investments.”

What has made Tencent so exceptional is that it has continued to grow in new ways.

“Tech companies can scale very quickly,” says Philip Short, Old Mutual Top 20 Fund portfolio manager. “Tencent has over one billion users, so when they bring out a new product or service, they already have a captive market of that size. That is why they are capable of growing quicker and easier than traditional businesses.”

Tencent’s dominance in its home market is quite extraordinary. “Something like 50% of the time spent online in China is on Tencent property,” points out Patrice Rassou, head of equities at Sanlam Investment Management.

Some analysts question whether the level of growth at Tencent can continue, but Short believes there is reason to believe that it can be sustained.

“There is some contention that Tencent’s growth is going to slow down, but in fact you are starting to see new growth vectors coming through,” he says. “New areas like mobile payments and cloud services could be the biggest revenue contributors in two to three years’ time.”

Rassou agrees. “Fundamentally, one has to believe that online will continue disrupting bricks and mortar over the long term,” he says. “You might have question marks as to how many more hours people can spend on gaming, but I think these business models evolve. They have shown capacity to move to new avenues of growth.”

Naspers is also starting to realise value from its other assets.

‘Strong growth’

“The structure and strategy of its assets is becoming evident,” says Short. “Areas like classifieds, food delivery and its own mobile payments were very nascent but you could see good, strong growth there.”

One of the company’s key appeals is the breadth of its investments. “There are so many different areas where they can capture huge chunks of revenues,” says Rassou. “They also keep reinventing themselves. For example, food delivery didn’t exist five years ago as a business line, but now it’s likely to become very big.”

This ability to identify new niche areas for growth is why many analysts remain positive on the company, despite the exceptional run that its share price it has already enjoyed.

“While we do not think there will ever be another investment as exceptional as Tencent, we expect Naspers to continue enhancing its portfolio and unlocking value for shareholders into the future,” says Giyose. “Especially since much of the portfolio outside Tencent is priced at a negative value by the market.”