The tech giant’s stock lost 11% after its largest shareholder decided to sell down its stake, retreating from recovery from a prolonged regulatory crackdown on the technology sector

Key takeaways:

  • Naspers, the top shareholder of Tencent, decided to sell an unspecified amount of the tech giant’s shares to address a valuation problem
  • Naspers’ plan creates a lot of uncertainty for Tencent stock as the share sales could go on for years

By Fai Pui

Tencent Holdings (0700.HK) can’t seem to catch a break nowadays.

Just until late last month, shares in the owner of popular messaging app WeChat had been on a slow recovery path from a March low that was reached amid broad selloffs in Chinese technology stocks sparked by a prolonged regulatory crackdown on the sector. A shift in Beijing’s stance to support the platform economy since March has drawn a collective sigh of relief from Tencent and other Chinese tech companies, helping lift their shares.

But then, last Monday, Tencent said that its largest shareholder, Naspers (NPN.JNB),  a South African group specializing in investment in technology companies, decided to sell down the stake in the Chinese tech giant it owns through subsidiary Prosus (PRX.AMS). And just like that, Tencent shares skidded 11% last week.

Naspers is backing out of a promise it made only last year not to sell Tencent shares for three years. The flip-flopping doesn’t necessarily signal that the South African group has suddenly turned bearish about Tencent.

Rather, at least on the surface, Naspers is making the move out of necessity. Shares  in Naspers and Netherlands-listed Prospus trade at heavy discounts to their net asset values, the bulk of which are derived from their Tencent stake. Selling Tencent shares helps solve one part of this problem by reducing overall net asset values. And Naspers plans to use the proceeds from Tencent share sales to buy back its stock and Prosus shares to shore up their prices and further narrow their discounts to the companies’ net asset values.

Regardless, this whole scheme is bad news for other Tencent shareholders. The worst part is that Naspers didn’t specify how many Tencent shares it plans to sell, only stating that it will not unload more than 3% to 5% of the total transaction volume for the stock on a given day. Also, it has no end date, leaving Tencent shareholders in the dark about when Naspers will decide to cease share disposal.

Broken promises

Naspers held nearly 2.8 billion Tencent shares at the end of last year, which gives it 28.82% ownership, according the Tencent’s latest annual report. The average daily trade volume for Tencent stock in the first quarter was 25.20 million shares. So if Naspers were to sell a substantial part of its Tencent stake, it could be years before the company stops dumping shares in the Chinese company. And that means Tencent stock would remain under selling pressure for a long time.

“Tencent is likely to fluctuate with a little chance to climb. Investors should not feel the need to swoop in as it is not a getting-in-on-the-ground-floor situation,” said Conita Hung, an investment strategy director at Tiger Faith Asset Management.

This isn’t the first time that Naspers has sold Tencent shares, with broken promises. It initially purchased a 46.5% stake in Tencent in 2001 for $32 million, an investment that has yielded a fat return. And in 2018, Naspers sold down its stake, with a pledge it wouldn’t sell more shares in the following three years, only to further trim its Tencent ownership through Prosus, which the group spun off in 2019. Naspers again cut its Tencent stake last year.

Tecent isn’t the only Chinese tech titan that is facing share sales by their big institutional backers.

Alibaba next?

Softbank (9984.J), which has had a headache due to troubled investments by its Vision Fund, has been selling Alibaba Group (BABA.US; 9988.HK) shares during tough times. Since 2016, SoftBank has sold chunks of Alibaba stock to pay off debt, plug losses and weather the Covid-19 pandemic. The Japanese group now owns about 25% of Alibaba.

And last Thursday, shares in artificial intelligence company SenseTime (0020.HK) tanked 47% all of a sudden, which was followed by a 19% plunge on Monday. The reason for the selloffs may be that the lockup period for early investors in the company expired last Thursday.

When SenseTime went public in December, it had nine cornerstone investors who bought the company shares as cheaply as for HK$0.156 apiece, according to the company’s IPO prospectus. The company’s stock traded at nearly HK$6 before the collapse, so the early investors should have made nice profits.

There are several companies that were listed around the same time as SenseTime’s IPO, including Chervon Holdings (2285.HK), Qingdao AInnovation Technology (2121.HK), Huitongda Network (9878.HK) and Lepu Biopharma (2157.HK). If their cornerstone investors are as impatient as SenseTime’s, their stocks may also suffer large drops soon.

All these episodes show that Chinese tech companies make attractive investments but they can also be victims of their own success.

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