A Tencent investor reduced his stake. It’s not bad for the Internet recovery in China.

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Internet conglomerate Prosus and its parent company Naspers reduced their stake in Tencent and sold shares of JD.com.

Gilles Sabrie/Bloomberg

When a big shareholder starts selling, that’s usually a flag. Internet conglomerate

Prosus

and its parent company

Nasper

Monday’s decision to reduce its stake in the Chinese internet company

Tencent Holdings
,

and its earlier sale of

JD.com

shares raises questions about whether long-time internet investors are reassessing the outlook for China’s internet sector.

So far, it feels like a case of “It’s me, not you.” dutch conglomerate

Prosus

(ticker: PRX.Netherlands), which owns the international interests of the South African holding company

Nasper

(NPSNY), broke its earlier promise not to sell shares of Tencent (700.Hong Kong) until 2024. Analysts see this as a move by Prosus, which owned about 28% of Tencent, to fix the discount at which the conglomerate is trading against its net asset value using the sale of some of its Tencent shares to fund a buyout.

The company said the sales will represent a small percentage of Tencent’s average daily trading volume, reiterating its belief in Tencent’s long-term value.

Nasper

also disclosed that it sold shares of

JD.com

(JD) that he had received as a special dividend from Tencent.

“Naspers is tackling the long-standing and excessive discount of around 50% it is trading at against Tencent,” says Marco Spinar, portfolio manager in Neuberger’s emerging markets equities team. Berman.

Part of that discount is due to the conglomerate’s ownership of Russian assets – internet company VK and classifieds firm Avito which it is listing for sale. Both have generated cash flow, which creates its own success, especially at a time when the market doesn’t see its best light on internet companies that are losing money in other parts of its portfolio.

The steep decline in Chinese internet stocks, including Tencent, hasn’t helped, nor have the company’s efforts to reduce the steep discount at which it trades to its net asset value, says Ola El-Shawarby, senior analyst at the emerging markets equity strategy at VanEck. The company’s decision to make its stock sales more structural and consider the impact on Tencent shares is positive for Prosus and Naspers, she adds.

It remains unclear how much of its stake in Tencent the conglomerate wants to cut and how much of the discount it wants to cut, El-Shawarby said. But she doesn’t see the move as a signal that the conglomerate has downgraded Chinese internet stocks. Spinar also downplays these signals, noting that the company has reiterated that it sees Tencent as a grassroots holding company with a bright future. % at $29.72

The decision comes as China’s internet sector has embarked on a nascent recovery in recent weeks after Chinese regulators indicated they were taking a break from the regulatory crackdown that has plagued the industry for the past two years. The


KraneShares CSI China Internet

The ETF (KWEB) is up 35% since late May, but still down 48% over the past year.

As shares of some internet giants have fallen 50% or more from their peak, value managers have started buying companies like Tencent and

Alibaba Holding Group

(BABA) believing that these companies will continue to be powerhouses. Their valuations reflect many of the worries about increased competition, dimmer growth prospects – Tencent, for example, seeing a slowdown in its core gaming business, as well as geopolitical noise.

Spinar is in the camp that continues to like both Tencent and JD, noting that growth will pick up as China’s Covid lockdowns ease and more supportive policies to stabilize the economy are implemented.

But others are starting to get tepid on Chinese equities again after the run of the past two weeks. After turning tactically positive on Chinese equities in May, TS Lombard’s Chief Emerging Markets Economist Larry Brainard is neutral again after the MSCI China Index gained 10% during the period. He noted that the call was tactical – like short-term – and stocks face longer-term issues.

“Chinese bulls have reappeared, but now is not the time to stay bullish,” Brainard warns. A big concern: China is sticking to its strict Zero-Covid policy, which will continue to hamper its economic growth. And there is little in China’s economic stabilization policies aimed at helping consumers that are needed for a recovery.

Write to Reshma Kapadia at [email protected]

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