Insight

Achievement Unlocked: hidden discounts in digital tech

AGT, AVI June 2020 Joe Bauernfreund

Many investors crave greater exposure to tech – and for good reason.

The seemingly endless rallies and sky-rocketing valuations are many investors’ panacea. But as the tech bubble continues to grow – seemingly unphased by the Covid-19 crisis – finding a decent price for high quality tech stocks is exceptionally difficult…

But not impossible.

A golden age

Forget the Dot Com bubble. We are in a golden age of technology companies. Forbes annual ranking of the top 2000 listed companies includes over 150 technology companies. Scroll down the rankings and you will see companies across the digital universe: from e-commerce and chipmakers, to cloud, information storage and AI. Many of them are household names. Think Amazon, Apple, Microsoft, IBM, Intel, Samsung, Facebook…

Some of the rising stars such as Slack, Zoom, Alibaba, Tencent, Alphabet or Lyft are gaining media attention and subsequent investment interest from institutions and investors alike.

If we are confident that we have picked the next Apple then another challenge emerges. What is a fair price to pay?

The challenge for investors is to determine which of these companies are here to stay. The growing list of fallen tech giants (Nokia, Yahoo, Kodak, Xerox, Blackberry) is a testament to the challenge posed to today’s market leaders.

So, if we are confident that we have picked the next Apple then another challenge emerges. What is a fair price to pay?

Enter holding-companies, and in particular…

Enter Prosus

A strategy employed at Asset Value Investors (AVI) is to buy into high-quality fast-growing technology companies through a listed holding company. Listed companies owning significant shareholdings in blue-chip technology companies is common. A prime example is Prosus – a Dutch listed technology focused company.

Prosus’s major asset is its 31% holding in Tencent, the HK listed media and services company, accounting for 85% of net asset value (NAV). In addition to this, they hold an array of market leading digital assets such as classifieds, e-payments and food delivery platforms.

Prosus are well placed to benefit from the accelerating secular shift to online. They are leaders in many of the markets they invest in. They hold over €4bln of net cash on their balance sheet and are in a strong position to assert their dominance in many markets with bolt on acquisitions.

The Tencent Factor

Image by Nintendo

Tencent is Prosus’ crown jewel. A Chinese media and social services behemoth owning WeChat, the world’s biggest social network with over 1 billion active users. The world’s largest online games developer with titles such as League of Legends, Fortnite and Call of Duty Mobile. China’s second largest mobile payment provider and third largest advertising platform. Yes, these are all owned by the same company.

With these far-reaching tendrils spanning the Chinese digital universe, we believe at a multiple of c. 26x, it is reasonably priced for the growth prospects. Growth seen in games titles such as ‘Honor of Kings’ and ‘Peacekeeper Elite’ has reinforced this, in addition to their strongest pipeline of games since 2008 with the release of DnF Mobile, LoL Mobile and Valorant. Year on year sales of these game titles jumped 31% over the recent holiday period and during the COVID19 global lockdown.

Prosus’ Performance

League of Legends Gaming Stadium

Prosus’ high returns are not solely due to Tencent, as some market analysts have suggested. Whilst this single investment did provide stellar returns, such a claim is unfair. Their average IRR excluding Tencent comes in at 19% (24% including Tencent).

Prosus currently trades on a discount to net asset value (NAV) of 29% . The NAV side of the equation shows great prospects for growth, from their unlisted assets and holding in Tencent which is primed to benefit from greater demand for home entertainment services, improving ad revenue and strong pipeline of mobile games. For a bonus, further growth prospects are in the pipeline through Prosus’s other unlisted technology assets.

By investing in Prosus we can buy into a high-quality, fast-growing technology company like Tencent at a significant hidden discount.

Find out more about our investment process.

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The information on this website is provided to you for informational purposes only and should not be regarded as an offer or solicitation of an offer to buy or sell any investments or related services that may be referenced on this website.The information on this website is subject to change without notice.

This website is primarily intended for UK residents. It is not intended for distribution to, or use by, any U.S. persons or persons in any other country where such distribution or use would be contrary to local law or regulation.

It is your responsibility to observe all applicable laws and regulations of any relevant jurisdiction.

No Tax or Legal Advice
Nothing on this website constitutes investment, legal, tax or other advice nor should it be relied upon in making an investment decision.

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As a result of money laundering regulations, additional documentation for identification purposes may be required when you make your investment. Full details are contained in the relevant subscription documents.

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Whilst all reasonable care has been taken in the preparation of this website, AVI cannot guarantee the accuracy or completeness of such information, either expressly or implied. Neither AVI, any of its directors, officers or employees, nor any third party vendor, will be liable or have any responsibility of any kind for any loss or damage that you incur in the event of any failure or interruption of this site, or resulting from the act or omission of any other party involved in making this site or the data contained therein available to you, or from any other cause relating to your access to, inability to access, or use of the site or these materials, whether or not the circumstances giving rise to such cause may have been within the control of AVI, or of any vendor providing software or services support.

All information and content on this website is, subject to applicable statutes and regulations, furnished “as is”, without warranty of any kind, express or implied, including but not limited to implied warranties of merchantability, fitness for a particular purpose or non-infringement. We make no warranty as to the operation, functionality or availability of this website, that the website will be error-free or that defects will be corrected.

In no event shall AVI be liable to any indirect, incidental, special or consequential damages arising out of or in connection with the use of this website, the inability to use this site or any products or services obtained or stored in or from this website, whether based on contract, tort, strict liability or otherwise. These limitations also apply to any third party claims against users.

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Everything on this website is the valuable intellectual property of Asset Value Investors Limited, or their respective suppliers. We protect our intellectual property rights to the full extent of the law.

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No permission is granted to copy, distribute, modify, post or frame any text, graphics, video, audio, software code, or user interface design or logos.

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AVI disclaims all responsibility for the content of third party sites

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For your protection, we require the use of encryption technologies for certain types of communications conducted through this website. While we provide those technologies and use other reasonable precautions to protect confidential information and provide suitable security, we do not guarantee or warrant that information transmitted through the Internet is secure, or that such transmissions will be free from delay, interruption, interception or error.

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AVI Global Trust plc is a public company listed and traded on the London Stock Exchange.

Past performance should not be seen as an indication of future performance. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested. The trust uses gearing techniques (leverage) which will exaggerate market movements both down and up which could mean sudden and large falls in market value. Please refer to the Key Features Document for further details effecting affecting your investment.

Applications to invest in AV Global Trust referred to on this Site, must only be made on the basis of the current Key Features Document, or other applicable terms and conditions. Past performance should not be seen as an indication of future performance. Market and exchange rate movements may cause the value of a fund to rise or fall and an investor may not get back the amount invested.

As a result of money laundering regulations, additional documentation for identification purposes may be required when you make your investment. Details are contained in the relevant application documents. If you are unsure about the meaning of any information provided please consult your financial adviser or other professional adviser.

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