What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing. Have you ever considered investing in tencent the chinese tech giant behind the ubiquitous wechat app? You could buy their shares directly on the hong kong stock exchange for 495.6 hong kong dollars per share. This gives them a market cap of about 610 billion usd. What, if i told you, there is a way to buy 10 cent shares at an almost 43 discount to their stated price of 495 hong kong dollars per share.

It's the functional equivalent of buying a 100 bill for 57, as it turns out. There's a dutch company called process which owns 29 of 10 cents outstanding shares the market value of its 10 cent stake is significantly larger than processes. Market cap, so buying process indirectly gives you ownership of 10 at a discounted price. This might seem impossible if investors can buy 10 shares at a discount through process.

Why do people continue buying them directly on the hong kong stock exchange at the higher price, it seems like a massive market inefficiency in an arbitrage opportunity, but it's a lot more complicated than it looks in this video we'll go over. What process is how they ended up owning 29 of 10 cent and why their stock price will probably continue to trade at a massive discount to their net asset value for many years to come. Process was listed on the amsterdam stock exchange in 2019, but their history goes back. Multiple decades process is a fully controlled subsidiary of naspers, a massive south african conglomerate that started out as a simple newspaper business.

In 1915, a group of people in south africa, supported by the prominent politician and businessman jenny marias, launched a nationality pers-beppert, which means national press in the afrikaans language. Many people started calling it naspers for short, naspers, published political newspapers and magazines in south africa and supported the south african national party. The company continued to expand within the south african media industry and by the late 20th century they entered into the television broadcasting business. In the 1980s, they bought a television channel called mnet founded by the south african businessman, kurz becker naspers acquisition of mnet allowed keus to join the company where he quickly rose.

The ranks eventually becoming ceo in 1997. curious had much bigger ambitions for naspers than just being a south african media company in the late 1990s, the internet was first getting started, and the tech bubble was inflating curious. Viewed this as a massive opportunity to put naspers at the forefront of the digital age. In 2000, they launched one of africa's first web portals called media24, but koos had ambitions to expand beyond the african continent.

In 2001 he met with a young chinese man by the name of mah hua tung, who had started an up-and-coming social media company called tencent naspers paid 32 million dollars for a 46.5 stake in the company, giving it a valuation of just 69 million dollars. There were no real synergies between tencent and naspers and they didn't integrate any of their operations. Kuz just wanted to build a portfolio of high-growth early stage tech companies, as he thought their valuations would increase over time. As ceo jews received no cash salary and his only compensation came in the form of incentive-based stock options, as the share price rose throughout the 2000s.

His ownership stake in the company grew substantially as his options vested while nasper's south african media business did well. The main force pushing up their share price was the appreciation of their investments such as tencent, which ipo'd in 2004 over the years. They built up stakes in a vast portfolio of startup companies, mostly in the media, technology and fintech industries. In a lot of ways, they are very similar to berkshire hathaway and softbank in that they started off as operating businesses, but their equity investments eventually became the majority of the firm's value.

But one thing that made naspers unique is its arcane corporate governance structure, naspers needed to issue new shares to fund its acquisitions, but at the same time cues didn't want to give up voting control. To this end, they created an extremely convoluted and opaque voting structure for the shares there are two classes of naspers stock class and shares are listed on the johannesburg stock exchange, and each share is entitled to one vote. They also have class a shares which have 1 000 votes per share, but only 150 economic ownership as class n shares class. A shares are not publicly listed on any exchange through ownership of the super voting a-class shares two shell companies, own 55 percent of the total voting rights, but only an insignificant economic interest in naspers.

The ownership of these shell companies is extremely convoluted and it is widely speculated that cuis becker and his related parties have voting control over the shell companies and thus voting control over naspers cruz has since stepped down as ceo, but still serves as chairman of the board Of directors and has significant influence over the company, the unequal voting structure laid the foundation for the eventual discount to net asset value or nav, which both naspers and process suffer from today, after 10 cents ipo in 2004, its stock price increased dramatically as your wechat app Gained popularity in china, as of the time of recording this video, the stock is up more than 600 fold since the ipo naspers 46.5 stake eventually got diluted, dumped to roughly 30 as tencent issued new shares, but even still by the 2010s. The 10 cent stake made up the vast majority of naspers enterprise value, given that that is the case, you would expect that naspers share price return would be in line with 10 cents, but, as you can see from this chart, 10 cent, which is represented by the Blue line has increased more than 10 fold over the past 10 years. Naspers, which is represented by the orange line, has increased less than fourfold. The phenomenon of nasper stock lagging that of tencent caused something very interesting to happen.

In 2016., naspers started trading at a discount to its 30 stake in 10 cent. The discount started out small but increased to as much as 30 in 2018.. Remember that naspers doesn't just own the 10 cent stake. They also own stakes and dozens of other technology startups.

As well as their media businesses in south africa, theoretically, if they sold their 10 cent stake and returned the cash to shareholders as a special dividend, the dividend would be more than the share price and the shareholders would still own naspers's other businesses, basically for free. You might wonder how this blatant market inefficiency is even possible. The reason this discount to nav is able to persist is because kuz-becker has no intention of returning significant capital to shareholders. Anytime soon, naspers has made over 100 billion dollars of gains on its investment portfolio, mostly from its 10-cent stake, and while they have trimmed their cent position from time to time, none of the proceeds were ever returned to shareholders.

They only pay a symbolic dividend, yield of 0.23 substantially all their investment gains and cash flows from their operating businesses goes towards buying stakes in new startups, given that they can almost double their shareholder value. By liquidating the tencent stake, you might wonder why they have refused to do this to understand why this is the case. You have to understand the incentive structure for chairman cruz becker, while he indirectly controls naspers through his shell companies and the super voting class a shares. His economic ownership is only a few percent.

Thus his incentives are not well aligned with shareholders. He doesn't really care that much what happens to the share price. He just wants to build naspers into a global technology and media empire to bolster his own prestige and legacy in the business world. There's a risk that they'll use the tencent money to invest in speculative startups and eventually go bankrupt and since there's so much uncertainty as to if or when shareholders ever get any capital return through dividends or buybacks, the stock market has punished the stock with a massive Discount to nav the value of a stock is the discounted value of its future dividends.

Theoretically, if they lock their assets within the company forever and never pay a significant dividend, you could say that the stock has zero value. While kuz was not willing to liquidate the business, he did want to decrease its discount to nav. A higher share price gives them more optionality if they want to issue new shares to fund more venture capital investments. To this end, in 2019, naspers tried a new gimmick that made the control structure of the company even more convoluted.

They created a new company called procyst, which they ipo'd on the amsterdam stock exchange process would not have any real operations and would purely be a holding company for naspers international assets. Under the terms of the new deal, naspers will continue to own the african media and ecommerce companies, media24 and tackalot.com. The value of these assets are relatively insignificant compared to their stakes in tencent and other international companies. All of these international assets will be transferred to process.

Importantly, naspers will control seventy four percent of processes, voting rights, so cues and his related parties will still have complete control, so this transaction does absolutely nothing to solve the corporate governance issues. The idea is that investors will be more willing to buy process shares, as it is listed on the amsterdam stock exchange compared to naspers, which is listed on the johannesburg stock exchange. This table shows all the publicly traded companies which process owns a steakhand. Tencent is the most significant by far with her stake being worth 178 billion us dollars, not a bad return as they bought.

This take for 32 million dollars 20 years ago. They estimate that their stakes in privately held companies is worth 34 billion us dollars. If you add the value of their listed and unlisted assets, the grand total comes out to 221 billion us dollars or 190 billion euros. The process transaction was meant to decrease their discount to nav, but it completely backfired, making the discount even wider, based on their shares outstanding.

This gives process a net asset value of 130 euros per share. Their share price of 74 euros represents a 43 discount to their nav, even if you only consider their stake in 10 cent and assign zero value to everything else, it still trades at a 29 discount, and if you think this discount is extreme, wait until you see The current discount of naspers stock, while naspers controls the majority of voting rights for process. They only have a 40 economic stake in the company based on processes. Nav naspers has a net asset value of 5946, south african rand per share.

Naspers current share price is only 2 551 per share. South african stocks are denominated in increments of one cent. So while it looks like it's 255 100, it's actually 2551.. This is a 57 discount to its nav process, already trades at a discount to nav and naspers.

Also trades at a discount to the market value of process. The discounts add together to yield this massive discount of 57. The process ipo completely failed in their gold to remove the discount to nav. If anything, the situation is even worse.

Now because there's another layer of complexity in their already arcane voting and control structure with the discounted nav remaining stubbornly large for both companies, they decide to try another financial engineering gimmick in may of 2021. They announced a plan for process to issue new shares on the amsterdam stock exchange and they'll use the proceeds to buy shares of naspers. The idea is that process discount is smaller than naspers, so they can create value by issuing shares of the more expensive processed stock. To buy shares of the cheaper naspers stock.

Additionally, it will increase the free flow of process and make it eligible for inclusion in some european stock market indexes. The share swap was executed in the summer of 2021, but did almost nothing to decrease the discounts of either stock. This is because naspers still maintains complete control over process and they're, maintaining their unequal voting rights structure, which is the root cause of the problem. As long as cruz becker maintains his complete control over naspers, the discount to nav will remain.

Furthermore, the shareswap transaction was very expensive, costing 144 million dollars in taxes and fees to investment bankers. This seems like a steep price to pay for a transaction that creates no real economic value, don't feel bad if you couldn't follow along with all the details of the naspers process control structure, it is one of the most complicated structures of any publicly traded company. The main point you need to understand is as follows: both process and naspers stock appear to be extremely undervalued because they trade at steep discounts to their stakes in tencent, but the reason for this discount is long-standing corporate governance issues that are unlikely to go away anytime Soon, while this video is not financial advice, many people would say that the unequal voting rights structure and empire building tendencies of naspers controlling shareholders make both naspers and process stock uninvestible, alright, guys that wraps it up for this video. What do you think about naspers? Is there 57 discounts and net asset value justified? Let us know in the comments section below as always.

Thank you so much for watching and we'll see you in the next video wall street millennial signing out.