9/1/22
In what is arguably the greatest ever investment, Naspers, under the guidance of Koos Bekker, invested $32 million into Tencent in 2001. At the time, Tencent was a newly established company, now it is a Chinese internet behemoth. The valuation of the investment reached $133 billion by 2019 – an CAGR of circa 65%.
On 2 November 2021, Mohnish Pabrai gave a lecture to Boston College (available on Youtube). In this lecture, he spent considerable time discussing Tencent and Naspers. Over the previous few months, Mohnish had been studying Tencent, specifically aiming to understand what makes it so successful. Reading through annual reports and call transcripts, he ultimately failed to uncover anything of substance, predominantly due to the Tencent management keeping their cards close to their chest. Approaching from a different angle, Mohnish looked through 20 years of Naspers call transcripts and annual reports. Given the management have sat on the Tencent board since their initial investment, it is obvious that Naspers management would have considerable knowledge. Again, however, the question was whether they would disclose anything of note.
The answer to this questions was an emphatic yes. Naspers, particularly Koos Bekker, has spoken openly about its Tencent investment across the years. The key tenet for the investment being the brilliance of Tencent’s management team. The kingpin within this management team is Pony Ma, a man who steers clear of the limelight.
I decided to go through some of the call transcripts myself, both to verify Mohnish’s claims and undercover any additional insight that Mohnish elected not to share.
Going from 2012 to date, some of the comments regarding the management are as follows:
“Tencent and Mail, which we do not manage, but are run by extremely competent teams“ – 2012
“I think that management team is second to none in the world and has frankly delivered on everything that ever touched” – 2015
“Pony, Martin and the Tencent team are doing an exceptional job, and we believe Tencent will uncover a number of incremental engines of long-term growth” – 2017
“we partner with entrepreneurs, with exceptional entrepreneurs, driven by their tenaciousness, by their skills and how they know local markets much better than anybody else would. Pony Ma is an excellent example” – 2017
“So Tencent, in our opinion, has probably the most exceptional leadership team of any Internet company in the world” – 2017
“we believe fundamentally in China and we believe in the quality of the Tencent leadership team” – 2021
“Tencent is led by a world-class leadership team” – 2021
The above is an extremely glowing reference, and it reinforces the points made by Mohnish. There are numerous metrics that can be used to assess management. Two of my personal favourites are return on equity and return on capital. By all accounts, these numbers from Tencent are impressive. Tencent is a business that can not only earn high rates of return on capital, but one which can reinvest this capital continuously back into the business.
The recent turmoil over the CCP actions has resulted in an exodus from Chinese stocks by Western investors. Tencent’s valuation has fallen 41% from its peak in February 2021 to the beginning of 2022. My view is that whilst some of these concerns are legitimate, the large majority are overdone. I believe there is merit in stepping back and considering the bigger, long-term picture. It is as good as agreed that China overtaking the US as the world’s largest economy is a matter of when, not if. There will most certainly be continued difficulties ahead for Chinese companies, especially in the short term. However, China tech will undoubtedly be dominating 10 years out. All I can say is I would not want to bet against Pony Ma positioning Tencent front and centre once all the dust settles.
Food for thought.