Naspers Ltd-190713 Final

PREPARED BY BNP PARIBAS SECURITIES ASIA

THIS MATERIAL HAS BEEN APPROVED FOR U.S DISTRIBUTION. IM

COMPANY REPORT

EQUITIES RESEARCH

NPN SJ

NASPERS LTD SOUTH AFRICA / MEDIA

HOLD FROM BUY

TARGET

PRIOR TP

CLOSE

UP/DOWNSIDE

INDUSTRY OUTLOOK é

Game theory

ASSOCIATE-DRIVEN Downgrade to HOLD; raise TP to ZAR829

We estimate that Naspers provides discounted entry into Tencent (700

HK, not rated), the dominant player in the online gaming sector in China,

of 9.8-20.9%. Despite the threat of regulatory intervention in local content

quotas and content sharing, we believe that DSTV is likely to remain

dominant in South Africa over the medium term.

DOMINANCE VS REGULATORY THREATStrong gaming, e-commerce in China

Our valuation reflects the improvement in consensus view of Tencent’s

growth prospects and our view of Naspers’ continued dominance of the

South Africa pay TV sector, despite the threat of regulatory intervention

in content quotas and wholesaling of content. We feel that much of the

improved consensus view is priced in, hence our HOLD rating.

CONSENSUS & ZAR EFFECTS We evaluate Tencent’s positioning and DSTV dominance in pay TV

We increase our TP to ZAR829 based on a two-stage FCFF DCF model and

downgrade to HOLD. Our model incorporates consensus estimates for

associates. The significant change here reflects the change in consensus

opinion of Tencent and a weakening ZAR. Risks: associates

consensus; regulatory intervention in SA pay-TV content wholesaling

KEY CHART Tencent’s proportion of Naspers’ NAV

Sources: Bloomberg; BNP Paribas Cadiz Securities

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CHANGE IN RECOMMENDATION

Ian Brink [email protected]

+27 21 834 3660

BNP Paribas Securities (Asia) Ltd. research is available on Thomson One, Bloomberg, TheMarkets.com, Factset and on your salesperson for authorisation. Please see the important notice on the back page.

IMPORTANT DISCLOSURES CAN BE FOUND IN THE DISCLOSURES APPEND

HOW WE DIFFER FROM T

Target Price* (ZAR)

Core HEPS 2014 (ZAR)

Core HEPS 2015 (ZAR)

Market Recs

* in cents

TARGET*

PRIOR TP*

CLOSE*

UP/DOWNSIDE

ZAR82,900

ZAR62,000

ZAR79,950

+3.7%

We estimate that Naspers provides discounted entry into Tencent (700

HK, not rated), the dominant player in the online gaming sector in China,

20.9%. Despite the threat of regulatory intervention in local content

believe that DSTV is likely to remain

ORY THREAT

Our valuation reflects the improvement in consensus view of Tencent’s

view of Naspers’ continued dominance of the

despite the threat of regulatory intervention

We feel that much of the

hence our HOLD rating.

positioning and DSTV dominance in pay TV

stage FCFF DCF model and

downgrade to HOLD. Our model incorporates consensus estimates for

nge here reflects the change in consensus

associates outperforming

TV content wholesaling.

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BNP Paribas Securities (Asia) Ltd. research is available on Thomson One, Bloomberg, TheMarkets.com, Factset and on http://eqresearch.bnpparibas.com/indexsalesperson for authorisation. Please see the important notice on the back page.

KEY STOCK DATAYE Mar (ZAR m)

Revenue

Rec. net profit

Recurring EPS (ZAR)

Prior rec. EPS (ZAR)

Chg. In EPS est. (%)

EPS growth (%)

Recurring P/E (x)

Dividend yield (%)

EV/EBITDA (x)

Price/book (x)

Net debt/Equity (%)

ROE (%)

Share price performance

Absolute (%)

Relative to country (%)

Next results

Mkt cap (USD m)

3m avg daily turnover (USD m)

Free float (%)

Major shareholder

12m high/low (ZAr)

3m historic vol. (%)

ADR ticker

ADR closing price (USD;

Issued shares (m)

Sources: Bloomberg consensus;estimates

42,177

47,177

52,177

57,177

62,177

67,177

72,177

77,177

82,177

87,177

Jul-12 Oct-12

(ZAr) Naspers Ltd

DIX

HOW WE DIFFER FROM THE STREET

BNPP Consensus % Diff

82,900 80,305 3.5

30.65 21.40 43.2

36.33 28.10 29.3

Positive Neutral Negative

11 4 1

http://eqresearch.bnpparibas.com/index. Please contact

19 JULY 2013

KEY STOCK DATA 2014E 2015E 2016E

59,029 68,932 79,169

11,836 14,027 20,109

30.65 36.33 52.08

24.25 28.96 -

26.4 25.4 N/A

11.2 18.5 43.4

26.1 22.0 15.4

0.6 0.7 0.8

14.6 12.1 9.1

4.8 4.0 3.4

2.8 (4.9) (11.1)

20.1 19.9 24.0

Share price performance 1 Month 3 Month 12 Month

5.5 38.8 75.2

5.1 30.1 54.3

March 2014

31,082

3m avg daily turnover (USD m) 117.7

75

State Street (17%)

79,950/44,373

31.3

NPSNY

ADR closing price (USD; 18 July 2013) 80.46

386

Sources: Bloomberg consensus; BNP Paribas Cadiz Securities

(3)

7

17

27

37

47

57

Jan-13 Apr-13 Jul-13

(%)Rel to FTSE JSE All Share

http://equities.bnpparibas.com/

Naspers Ltd Ian Brink

2 BNP PARIBAS 19 JULY 2013

Introduction

Over the last few years, the performance of Naspers has been strongly linked to the performance of its 34%-owned associate Tencent (400 HK, not rated). During the five years to 10 July 2013, Tencent’s share price rose approximately 423% (39% annualised) while the Hang Seng declined 6% (1% annualised). On the back of this strong share price performance by Tencent, as well as the strong performance of another key associate, mail.ru (MAIL LI, not rated) and the pay TV segment, Naspers’ share price has climbed approximately 373% (37% annualised) over the same period, significantly outperforming the FTSE JSE All Share which climbed 43% (7% annualised).

E-commerce remains the key growth area, but with management unable to give any specific indication of when the e-commerce business as a whole is expected to turn profitable, the prospects for the business remain firmly a function of the performance of its pay-TV operations as well as the performance of its key associates, most importantly Tencent.

In this note we:

§ Identify the key trends developing in the Chinese internet market;

§ Evaluate Tencent’s positioning in this market and its exposure to these emerging trends;

§ Test the hypothesis that Naspers provides a discounted entry point into Tencent, and attempt to estimate this discount;

§ Provide a breakdown of the different types of broadcasting content and arrive at an estimate of the price differential between locally produced and foreign procured content. We also highlight the potential threats to the domestic pay-TV business from new entrants and potential changes to the regulatory framework.

We update our valuation accordingly.

Tencent’s performance continues to drive Naspers’ share price

Tencent continues to be the main driver of Naspers’ share price – comprising nearly 81% of the share price on a NAV basis. Tencent’s performance during Q1 2013 surprised the market on the upside with revenue increasing 40% y-y to RMB13,548m (USD2.16b) and diluted EPS increasing 36.5% to RMB2.17. The exhibits below show the price performance of Tencent and Naspers over the last five years as well as the contribution which Tencent makes to Naspers on a NAV basis.

EXHIBIT 1: Naspers versus Tencent price performance (rebased to 1) EXHIBIT 2: Tencent as a proportion of Naspers’ NAV

Source: Bloomberg

Source: Bloomberg

The continued positive performance of Naspers thus hinges strongly on the growth prospects of Tencent going forward.

As a result of slower Chinese GDP growth, growth in internet penetration in China has slowed. Tencent is still largely dependent on China for its revenue. China contributed approximately 95% to Tencent’s group revenue in FY12. The exhibit below shows the trend in Chinese GDP as well as the growth of Chinese internet penetration.

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EXHIBIT 3: Chinese annualised quarterly GDP (%)

EXHIBIT 4: Chinese internet penetration and annual growth in internet users (%)

Source: Bloomberg

Source: China Internet Watch

From the above exhibits we note the following:

§ Internet penetration in China as at the end of 2012 stood at around 42% – the low internet penetration rate presents an organic growth opportunity for internet-related businesses such as Tencent.

§ Lower levels of economic activity over the last few years are partly to blame for the slowdown in internet penetration growth over the last few years.

§ The negative impact on organic growth due to slower growth in internet penetration has been mitigated by increased revenue per user due to increased mobile internet usage and more advanced and data-intensive handsets and applications.

A summary of Tencent’s performance

The exhibit below shows Tencent’s segmental revenue contribution for Q1 2013 and FY2012.

EXHIBIT 5: Tencent segmental contribution

Segment 1QFY13 FY12

(%) (%)

VAS (IVAS and MVAS) 78.7 81.4

Online advertising 6.3 7.7

E-commerce 14.1 10.1

Other 0.9 0.8

Source: Tencent

We note the following:

§ Value added services (VAS), both internet-based (IVAS) and mobile-based (MVAS), make the largest contribution to group revenue. VAS includes social networking, web search, micro-blogging, avatar sales, music consumption, email and gaming.

§ IVAS and MVAS: The largest contribution to this segment is online gaming. Online gaming is very popular in China, with nearly 330m individuals participating in the pastime. Global online gaming is estimated to generate annual revenue of around USD15b during 2013, 62% of which is expected to come from China according to Strategy Analytics. Niko Partners estimates that online gaming in China alone could reach USD11.9b this year.

§ Online advertising revenue declined 10.3% q-q during Q1 due to seasonality, with advertisers typically spending less during the first quarter of the year.

§ Tencent launched its open e-commerce platform towards the end of 2011 to leverage its existing subscriber base in an attempt to participate in the rapidly expanding e-commerce sector. Building of the e-commerce platform remains a key priority for Tencent. In a short period of time, the e-commerce strategy, which exploits the principle of “social commerce”, has paid significant dividends. E-commerce

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Penetration Annual growth in internet users



made a revenue contribution of 14.1% during Q1FY13. Social commerce uses interactions on social media and user contributions to drive product sales.

An overview of the Chinese internet market

The exhibit below shows the trend in internet users in China.

EXHIBIT 6: Number of internet users in China

Source: CNNIC

As at the end of December 2012, China had approximately 564m internet users. The Chinese Ministry of Industry predicts that the amount of “netizens” (individuals who access the internet), is likely to rise to approximately 800m by 2015.

The exhibit below provides an overview of the various web activities which comprise the Chinese internet market together with the penetration rates (as a proportion of internet users), as well as the growth rates in activity for the six months to June 2012.

EXHIBIT 7: Web activity in China

Web-activity Penetration Growth rate *

(%) (%)

Instant Messaging 82.8 7.2

Search 79.7 5.2

Music 76.4 6.4

News 73.0 6.9

Blogs / Personal sites 65.7 10.9

Videos 65.1 7.6

Games 61.6 2.1

Micro-blogs 50.9 9.5

Email 48.1 5.1

Social Networking 46.6 2.6

E-commerce 39.0 8.2

E-learning 36.2 (4)

E-banking 35.5 14.8

E-payment 34.8 12.3

Forums 29.0 7.7

Group buying 11.5 (4.4)

Travel booking 7.9 1.2

Online investing 7.0 (5.5)

Sources: Tech in Asia; Tencent

From the above exhibit we note the following:

§ Among internet users, instant messaging is the most popular web activity. Tencent’s QQ is dominant in this regard.

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§ Web search, downloaded and streamed music, news consumption, blogging, online video streaming, gaming and micro-blogging are the next most popular activities, in order. Tencent has exposure to all of these activities as well as email, social networking and e-commerce.

§ E-banking and e-payments were the fastest growing web activities followed by blogging and updating of personal web-sites.

§ Online investing, group buying and e-learning are the fastest shrinking web activities.

China’s internet landscape is dominated by three companies – Baidu Inc - ADR (BIDU US; BUY; CP USD111.2), Tencent and ALIBABA.COM LTD (1688 HK; not rated), with Tencent being the largest in terms of revenue, traffic volume and application exposure.

Consolidation of the Chinese internet market

Intense competition between China’s big three internet businesses has resulted in some consolidation of the market. Currently, online market place Alibaba dominates the e-commerce space, Baidu dominates web search and Tencent dominates messaging and gaming, but also has fairly broad exposure to other industry segments. The most significant trend in the Chinese internet space is the growth in mobile internet usage. With both an established PC and mobile presence and an existing subscriber base on each, Tencent seems well positioned to exploit this trend. The most significant internet-related acquisitions over the last year include:

§ The acquisition of an 18% stake in Sina Corporation’s micro-blogging service by e-commerce firm Alibaba for USD586m in April this year. Sina Weibo is China’s largest micro-blogging service, with more than 500m subscribers. Micro-blogging is the generic name given to services similar to Twitter’s. The acquisition will help to position Alibaba for the migration from e-commerce to m-commerce by allowing it to tap into Weibo’s existing mobile subscriber base.

§ Baidu’s acquisition of the online video platform of PPS for USD350m in May this year. PPS will be merged with Baidu’s online video business, iQiyi to form China’s largest online video platform. The acquisition will allow Baidu to build a strong presence in online video sharing which is monetised via advertising. Baidu’s market share of mobile search is approximately 35% with less than 10% of revenue being derived from mobile ads in 2012 (Beijing Daily, WIC). Baidu has struggled to diversify its business. Only two years after launching its e-commerce platform it was forced to shut it down.

§ In August last year, Chinese online video platform Youku acquired its rival Tudou and, as such, became the largest online video platform in the country, with more than 30% of the market and a user base of more than 450m users.

Chinese e-commerce growth potential

In 2012, more than USD200b was spent online in China (this excludes food and travel) – this is approximately ten times more than was spent in 2008 (WIC). The e-commerce industry in China is expected to grow to approximately USD300b by the end of 2013, with China’s online sales surpassing the US for the first time this year. The Chinese are expected to spend approximately USD296b in 2013, slightly higher than the US’s USD252b. Growth in Chinese e-commerce sales is expected to decline to 19% in 2013 from 23% the previous year (Source: iResearch).

During 2012, China’s largest e-commerce business (Alibaba) generated USD160b in revenue – with revenue from “first-tier cities” including Beijing, Shanghai and Guangzhou growing 40% y-y and sales in lower-tier cities growing at 60% (TIA). The exhibits below show the historical and forecast trend in online sales and online sales growth in China as well as the trend in the number of online shoppers and penetration of online shopping amongst internet users.



EXHIBIT 8: Online sales and online sales growth in China including forecasts

EXHIBIT 9: Number of online shoppers and online shopping penetration of internet users.

Source: Observer solutions via TIA

Sources: CINIC; Observer Solutions; TIA

Search in China dominated by Baidu

One of the web activities in China which Tencent does not dominate is web-search. This space is almost entirely owned by Baidu which had an estimated market share of approximately 81% as at the end of Q1FY13. In the year ending March 2013, the PC search engine sector in China generated revenue of approximately USD4.8b according to estimates by iResearch. During Q1 2013, PC web search shrank 6.8% mainly as a result of increased search on mobile devices. Tencent’s search engine SOSO has a revenue market share of less than 2% of Chinese search. With the entrenchment of Baidu in the search sector, it seems unlikely that Tencent will gain traction in this area over the medium term, in our opinion.

EXHIBIT 10: Search engine market size in China

Sources: iResearch; 1USD = 6.14 CNY

Gaming is big business in China

In FY12, total Chinese gaming revenue grew 35% y-y to USD9.7b (Techweb). Online gaming accounts for nearly 90% of total gaming revenue. The gaming industry report compiled by Techweb estimates that revenue from gaming could grow to approximately USD21.7b by 2017 – an annualised rate of 12.4%.

Tencent’s share of online gaming revenue grew to RMB7,472m in 1Q13, mainly as a result of revenue derived from the Chinese market, which accounted for approximately 88%. Tencent either develops its own games or licenses games belonging to other developers.

The strong revenue derived by Tencent from gaming during 1QFY13 resulted from:

§ The high demand for its titles such as Cross Fire, Dungeon and Fighter and League of Legends – which are among the most popular gaming titles in the country;

§ Seasonal effects of the Chinese New Year holidays and the winter break for students during the quarter;

§ A positive response to expansion packs on existing game titles;

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§ The contribution of new self-developed gaming titles;

§ Strong revenue growth derived (albeit off a low base) from international markets;

§ Increased revenue from mobile gaming.

The online gaming sector in China is highly competitive. During 1Q13, the top-six gaming companies in China (which includes Tencent, Netease, Changyou, Shanda, Perfect World and Giant) generated revenue of approximately USD2.09b, of which Tencent generated USD1.2b or 58%.

The exhibit below provides the breakdown of the distribution of gaming revenue across the top-six gaming companies in China.

EXHIBIT 11: First quarter revenue of the top-six gaming companies in China

Sources: TIA; Tencent

Tencent’s performance in the gaming sector is supported by a strong portfolio of existing game titles. The exhibit below shows the top-20 online games ranked according to their popularity as measured by one of China’s most popular gaming portals, 17173.com. The titles highlighted in grey indicate those which were either developed by, or licensed to, Tencent.

EXHIBIT 12: Top-15 most popular game titles in China as at 14 July 2013

Rank Title Developer Operator

1 League of Legends Riot Games Tencent

2 DNF Neople Tencent

3 Fantasy Westward Journey 2 Netease Netease

4 World of Warcraft Blizzard Netease

5 Cross Fire Smilegate Tencent

6 Jian Wang 3 Kingsoft Kingsoft

7 Dragon Sohu tour Sohu tour

8 QQ Speed Tencent Tencent

9 Dragon in the day Tencent Tencent

10 World of Tanks War gaming Air Network

11 Westward Journey 2 Netease Netease

12 Wuhun Netease Netease

13 Perfect World Perfect World Perfect World

14 Zhu Xian 2 Perfect World Perfect World

15 Kart Nexon TianCity

Source: 17173.com


§ Of the top-15 most popular games in China according to gaming portal 17173.com, five (including three of the top five) were developed by/licensed to Tencent.

§ Tencent’s next largest competitor – Netease – developed and/or licensed four of the top 15.

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§ Rankings differ slightly from portal to portal, but League of Legends, Dragon Fighter and Cross Fire consistently occur in the top-five most popular games.

The table below shows the top-15 most anticipated new gaming titles according to 17173.com.

EXHIBIT 13: Top-15 most anticipated gaming titles in China as at 14 July 2013

Rank Titles Developer Operator

1 A sword of the Spirit Ncsoft Tencent

2 Guild Wars 2 ArenaNet Air Network

3 ArcheAge XL Games Tencent

4 Fighting Ares Tencent Tencent

5 Paradise Eternal Ncsoft Unknown

6 Blast Blade Allm Tencent

7 Elder Scrolls OL Bethseda Unknown

8 horizon moon knife Tencent Tencent

9 Final Fantasy 14 Square Enix Shanda

10 To the City of Light Eyedentity Shanda

11 MU2 6574 Webzen Unknown

12 Dragon Quest 10 Square Enix Unknown

13 Long Sword Net Ease Net Ease

14 Fighter World War Gaming Air Network

15 Swords 2 Pixel Network Tencent

Source: 17173.com


§ Of the top-15 most anticipated titles, six have been developed and/or licensed to Tencent (including three of the top five).

§ Netease only has a single title at number 13 in the top 15, while another competitor, Shanda, has two titles.

Unbanning gaming consoles in China

One of the reasons contributing to the thriving online gaming industry in China was the banning of video game consoles in 2000. Thirteen years later, the Chinese government is considering lifting the ban on video game consoles. The move could see the big game console manufacturers benefiting by gaining exposure to a potentially large and untapped market, but the online gaming providers could see their share of the gaming market decline as users migrate away from online games towards console-based games. Even though there is currently a black market for illegal gaming consoles in China, console game revenue is estimated to generate a mere 0.1% of total gaming revenue according to Techweb.

The growing importance of mobile internet

With nearly half of the Chinese population residing in rural parts of the country, mobile access to the internet is becoming increasingly important. As of June 2012, it is estimated that mobile internet users in China (388m) overtook PC users (380m) for the first time – bringing the proportion of Chinese internet users who make use of mobile devices to browse the internet to around 75%. The exhibits below show the trend in China’s mobile internet users as well as the proportion of internet users per access method.



EXHIBIT 14: Mobile internet users in China EXHIBIT 15: Proportion of Chinese internet users per access mechanism (PC and mobile)

Source: IResearch

Source: China Internet Network Information Centre (CINNIC)


§ Over the next three years, the number of mobile internet users is expected to increase strongly. By 2015, iResearch estimates approximately 712m mobile internet users – a CAGR of 20% over the next 3 years.

§ Towards the end of 2012, the proportion of Chinese internet users connected via mobile devices exceeded those connected via PCs for the first time.

§ Mobile internet penetration continues to trend upwards, whilst PC internet penetration appears to be trending down to flat.

§ The above trends illustrate the importance of having exposure to mobile internet usage. With monthly active users (MAU) of 550m on Mobile QQ and 194m MAU on Weixin as at Q1 2013, Tencent seems well positioned to benefit from this trend.

The exhibits below show the segmental breakdown of the Chinese mobile internet market as well as the revenue trend of the Chinese mobile internet market on a quarterly basis.

EXHIBIT 16: Segmental breakdown of the Chinese mobile internet market

EXHIBIT 17: Chinese mobile internet revenue trend and y-y growth

Source: iResearch

USD1 = RMB6.14 Source: iResearch


§ Mobile search makes the smallest revenue contribution – less than 3%.

§ Mobile shopping contributes approximately a third to mobile internet revenue.

§ Revenue from China’s mobile internet market grew approximately 75% y-y to the end of Q1 2013 – with quarterly revenue reaching approximately USD3.3b. Even though still relatively small in comparison to

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the total size of the Chinese internet economy, the high rate of growth is expected to persist over the medium term as mobile internet continues to increase in penetration. As at Q3 2013, mobile internet revenues comprised approximately 14% of the total internet economy in China.

Given the ongoing adoption of mobile devices as a means of connecting to the internet, which is not only confined to China, it is hardly surprising that a key part of Tencent’s strategy is to deploy and monetise a mobile platform.

The monetisation of WeChat/Weixin

Weixin is a multi-service mobile communications application developed by Tencent in 2011 for deployment in China. The service has subsequently been employed in the international market under the marque WeChat. Even though the basic functionality of the application is available free-of-charge to the user, Tencent seeks to entrench the application both in China and outside its borders and then to monetise certain additional features.

Weixin/WeChat could satisfy multiple requirements for the continued success of Tencent. On the one hand it provides the business with another means of participating in the growth of mobile-based web activity, and it also provides a mechanism for building Tencent’s international footprint.

The exhibit below shows the trend in the proportion of Tencent’s revenue derived from China.

EXHIBIT 18: Tencent revenue derived from China

Source: Bloomberg

During 1Q13, Weixin and WeChat averaged approximately 194m monthly active users (MAU) – implying growth of 228% y-y.

Approximately 300m Weixin/WeChat users reside in China, while approximately 70m reside outside of China, suggesting that as a mechanism for geographic diversification, international WeChat penetration still has some way to go.

Weixin/WeChat users are expected to reach 400m by year-end (China News). The rapid growth in Weixin subscribers has resulted in a dispute with China’s largest operator, China Mobile (941 HK, BUY, CP: HKD81.30). The dispute arose out of the fact that WeChat resulted in the cannibalisation of the mobile operator’s messaging revenue while at the same time generating large volumes of traffic and negatively impacting the operator’s available capacity. China Mobile attempted to force Tencent into a revenue-sharing agreement but eventually backed down. Even though this issue seems to have been put to rest, the fact that it could resurface remains a threat – especially as penetration grows in other international markets.

One of the ways in which Tencent seeks to monetise Weixin and WeChat is through the deployment of a gaming platform. The platform will consolidate Tencent’s existing mobile offering which includes Mobile QQ and Qzone, QQ store and QQ Game Hall with Weixin/WeChat. On 10 July 2013 Tencent deployed its first Weixin-based game, LinkLink, on Android – still in the pilot stage. The strategy seems plausible given that it follows similar successful steps by platforms such as KakaoTalk to migrate from exclusively chat platforms to mobile gaming platforms.

Other monetisation strategies include the deployment of a mobile payment system on Weixin/WeChat which will position Tencent to compete against Alibaba for a share of m-commerce. Currently, Tencent’s payment platform is the second-largest in the country – behind Alibaba’s Alipay.

100.0% 100.0% 100.0% 99.9%

98.4%

95.1%

92%

93%

94%

95%

96%

97%

98%

99%

100%

2007 2008 2009 2010 2011 2012



Naspers a discounted entry point into Tencent

“Is Naspers purely a play on Tencent (and Mail.ru), and if so, why should investors who can, not simply invest directly in Tencent (and Mail.ru)?” This is a question which frequently bedevils potential investors.

Even though we are downgrading Naspers based on the current market price relative to our DCF valuation, we attempt to answer this question in the following discussion and analysis.

There are two potential answers to this question:

1 By investing in Naspers (as opposed to directly investing in Tencent), the investor gains exposure to Naspers’ established and cash-generative pay-TV business in South Africa and growth pay-TV assets in sub-Saharan Africa as well as exposure to Naspers’ e-commerce, which is still very much in the building phase but likely to be a growth asset going forward.

2 For those investors who are sceptical of the e-commerce growth story, one suggestion is that Naspers also provides a discounted entry point into Tencent. We test this thesis below by revisiting our sum-of-the-parts (SoTP) valuation below.

Something is at a discount

In our initiation report on Naspers (Casting the net, 1 November 2012), we made use of a sum-of-the-parts valuation to value the company at ZAR679-763 implying a discount of between 16-31%. The pertinent question, however, is which part of Naspers is one purchasing at a discount? For investors who are only interested in gaining access to Tencent, Naspers may be seen as a discounted entry point. Alternatively, the rump (i.e. everything else except Tencent and Mail.ru) might be discounted and Tencent and Mail.ru might be fully priced.

If Naspers is a “cheaper” entry point into Tencent, then essentially the following should apply:

{(Naspers [NAV] – Pay TV – Mail.ru – Print – Other) / 34%} < Tencent [NAV]

By updating our SoTP valuation we estimate this discount as follows:

§ The value of the pay TV and print business using EV/EBITDA multiples based on work done by Stern Business School (see our initiation report for details).

§ We provide both a lower bound and an upper bound assumption on EV/EBITDA multiples for pay TV and Print as per Stern’s guidance for EM and DM markets, respectively. Our lower bound also assumes exit costs of 10% versus exit costs of 5% for the upper bound.

§ In using EV/EBITDA for the pay-TV and print segments we are assuming that the carried debt related to these segments is close to zero, which implies that the EV and NAV are very similar. For pay TV and print this is probably a fair assumption.

§ Unlisted assets are valued at their carrying value (cost less depreciation and impairment)

§ Listed associates (excluding Tencent) are valued at their proportional market caps.



This yields the following segmental valuations.

EXHIBIT 19: Tencent entry point discount assumptions as at 3 July 2013

------------ Lower bound ------------

------------ Upper bound ------------

EBITDA EV/EBITDA Valuation

EBITDA EV/EBITDA Valuation

(ZAR m) (x) (ZAR m)

(ZAR m (x) (ZAR m)

Pay TV 8,933 6.45 57,618

8,933 7.99 71,375

Print 1,167 5.86 6,839

1,167 6.84 7,982

64,456

79,357

Carrying value of unlisted assets FY12

22,810

22,810

Acquisitions in FY13

6,437

6,437

29,247

29,247

Mcap Share Valuation

Mcap Share Valuation

(ZAR m) (%) (ZAR m)

(ZAR m) (%) (ZAR m)

Mail.ru 64,096 29.0 18,588

64,096 29.0 18,588

BMC 1,137 9.9 113

1,137 9.9 113

18,700

18,700

Source: BNP Paribas Cadiz Securities

Using these segmental valuations we arrive at a lower bound and upper bound discounted entry point into Tencent via Naspers as follows:

EXHIBIT 20: Implied Tencent entry point discount as at 3 July 2013

Consideration Lower Bound Upper Bound

NPN Market Cap (ZAR m) 309,000 309,000

Pay TV & Print (ZAR m) 64,456 79,357

Mail & BMC (ZAR m) 18,700 18,700

Internet and Tech (ZAR m) 29,247 29,247

Implied NAV of Tencent share (34%) 196,596 181,696

Implied NAV of Tencent (100%) 578,224 534,399

Market value of Tencent NAV (ZAR) 721,137 721,137

Discount on Tencent stake 142,913 186,738

Implied holding company discount (%) 19.8 25.9

Less exit costs (%) 10.0 5.0

Entry point discount (%) 9.8 20.9


With a fairly conservative rump valuation, we estimate the discount into Tencent via Naspers as at 3 July 2013 at between 9.8% and 20.9% - this includes the impact of exit costs. Applying the same methodology and pay TV and print multiples as above, we estimate the entry point discount into Tencent via Naspers as at 3 July 2012 (a year ago).

EXHIBIT 21: Implied Tencent entry point discount as at 3 July 2012

Consideration Lower bound Upper bound

NPN Market Cap (ZAR m) 183 322 183 322

Pay TV & Print (ZAR m) 56 263 69 083

Mail & BMC (ZAR m) 16 708 16 708

Internet and Tech (ZAR m) 22 810 22 810

Implied NAV of Tencent share (34%) 87 541 74 721

Implied NAV of Tencent (100%) 257 473 219 769

Market value of Tencent NAV (ZAR) 446 134 446 134

Discount on Tencent stake 142 913 186 738

Implied holding company discount (%) 42.3 50.7

Less exit costs (%) 10.0 5.0

Entry point discount (%) 32.3 45.7

Sources: BNP Paribas Cadiz Securities



As at 3 July 2012, we estimate the entry point discount into Tencent via Naspers at between 32.3% and 45.7% - significantly larger than the current discount. This suggests there is now less incentive to invest in Naspers purely to gain exposure to Tencent.

Sum-of-the-parts valuation

We apply our conservative multiples for pay TV and print as well as exit costs of 10% to arrive at a lower bound SoTP valuation of Naspers.

EXHIBIT 22: Lower bound NAV estimate

Segment Valuation method Est. value Comment

(ZAR m)

Pay TV EV/EBITDA multiple 57,618 Lower of EM and Global multiples

Listed assets Market capitalisation 280,515 Est. Flow through value

Internet a d Technology Est. carrying value 29,247 Cost less impairments

Print EV/EBITDA multiple 6,839 Lower of EM and Global multiples

374,219

Est. exit costs (%) 10

SOTP valuation 336,797

Per share: 854.16

Implied discount (%) 2


We apply more aggressive multiples for pay TV and print as well as exit costs of 5% to arrive at an upper bound SoTP valuation of Naspers.

EXHIBIT 23: Upper bound NAV estimate

Segment Valuation method Est. value Comment

(ZAR m)

Pay TV EV/EBITDA multiple 71,375 Higher of EM and Global multiples

Listed assets Market capitalisation 280,515 Est. Flow through value

Internet and Technology Est. carrying value 29,247 Cost less impairments

Print EV/EBITDA multiple 7,982 Higher of EM and Global multiples

389,119

Est. exit costs (%) 5

SOTP valuation 369,663

Per share: 937.52

Implied discount (%) 12


On this basis Naspers should be trading in the ZAR854-938 range – implying a discount of 2% to 12%.

Summary

§ Tencent has exposure to all of the most popular web activities in China, including e-commerce, which is expected to grow dramatically over the next few years.

§ With six of the top 15 and three of the top five most anticipated new online games, Tencent appears to have a much stronger gaming pipeline than any of its major competitors; this should help it to retain its dominance of the highly lucrative gaming sector in China over the medium term.

§ Tencent’s existing mobile subscriber base places it in a good position to benefit from the growth in mobile internet usage. Mobile internet access now exceeds PC internet access in China.

§ Wexin/WeChat provides Tencent with another means of participating in the growth of mobile-based web activity in China. It also helps Tencent to diversify its geographic exposure. Given the rate at which Weixin’s subscriber base is growing, the deployment of a games platform on it could be highly lucrative.



§ By our estimates, Naspers could provide a discounted entry point into Tencent of between 9.8% and 20.9%.

Pay TV

Naspers’ pay-TV business in SA remains dominant and largely unchallenged. Even though we expect DSTV to remain dominant over the medium term, we believe that a number of potential threats could impact the profitability of the business going forward. These issues include:

§ More onerous local content quotas – the proportion of content which is regulatory required to be locally produced;

§ Potential competition from new license awardees;

§ The threat of amended regulation around programming content exclusivity and wholesaling.

SA Local content quotas

In our note TV Turf Wars (25 January 2013), we highlighted the following:

§ The importance of local content in the domestic pay TV market. Of the top-10 most popular programmes on SA television ranked using the audience measurement rating (AMR) all 10 are locally produced shows and all are screened on SABC1.

§ Local content is incredibly costly to produce and, as such, is one of the factors that has negatively impacted on the profitability of the public broadcaster – the SABC.

§ Local content quotas are prescribed by ICASA. Currently, subscription operators such as DSTV in SA are only required to screen 8% local content – much less than the public broadcaster and private commercial channels, which are required to have 55% and 35% local content, respectively.

Quantifying the difference between local and international content pricing

Based on our discussions with a broadcasting content aggregation and production executive, we highlight the differences in programming cost between locally-produced and foreign-procured content as follows:

§ Locally produced content production costs in SA could range from ZAR1,500 to ZAR27,000 per minute depending on the nature and popularity of the series/drama.

§ In contrast, foreign premium content prices can vary from USD1,000 to USD10,000 per episode for a 21 minute programme (for new content) – or ZAR476 to ZAR4,760 per minute – with the actual price being dependent on the target market and the popularity of the series and length of the episode. Often, international content is purchased in 'bundled' distribution deals of premium and library content.

§ Other factors that impact international content acquisition prices include the size of the broadcasters’ subscriber base, exclusivity, type of channel (free-to-air or pay channel), ratio of repeats, intended broadcast time-slot (primetime versus shoulder), period of the broadcasting rights and personal relationships with the content providers.

§ Older international content can be acquired at a significant discount. An old series of a 21 minute sitcom can be acquired for between USD250 and USD700 per 21 minute episode (or ZAR119 to ZAR333 per minute).

§ The generally accepted market norm for a syndicated international channel (often referred to as a 'turnaround' channel) is approximately USD25,000/month for 24hr-a-day programming (ZAR174 per minute of programming). More often than not, these turnaround channels are comprised of a 6-8hr 'prime-time' window – which carries the channel’s feature programming, with various shoulder period and 'day-time' loops making up the balance of a 24hr daily schedule.



The exhibit below summarises the programming cost comparison.

EXHIBIT 24: Pricing comparison between locally produced and finished programming content

Type of content Price per minute

(ZAR)

Locally produced (premium) content 1,500 to 27,000

Internationally procured (newish premium) content 476 to 4,760

Internationally procured (older) content 119 to 333

Syndicated programming 174

Source: Discussions with a broadcasting content aggregation and production executive

On average, on a like for like basis, finished programming is about 5-10 times cheaper than locally commissioned and produced content.

Naspers spent approximately ZAR1b on 6,000 hours of locally produced content in FY13 amounting to ZAR2,777 per minute.

The significant difference in pricing between locally produced content and internationally sourced content implies that if DSTV increases the proportion of local content, either out of necessity due to regulatory pressure or the desire to capture greater market share, this could put pressure on pay TV margins in SA.

Estimating the impact of increased SA local content on total Pay TV Margin

Programming content comprised approximately 32.5% of total pay TV operating costs during FY13. During FY13, ZAR6.94b was spent on programming content across SA and SSA. We expect that the amount of local programming content in SA is likely to increase, due to either DSTV’s desire to boost domestic ratings or to the introduction of more onerous local content quotas in SA. In our note TV Turf Wars (25 January 2013) – we illustrated the relative popularity of locally produced shows.

We estimate the potential impact of an increase in local SA content on pay TV margin by making the following assumptions and estimates:

§ Using the revenue contribution split between SA and SSA as a basis, we assume that SA comprises 73% of the total programming cost spent in FY13 - ZAR5.03b

§ Local content costs approximately ZAR166k per hour – based on Naspers’ disclosure in its FY13 results that it spent ZAR1b on > 6000 hours of local content across SA and SSA.

§ We estimate the SA share of local content hours at 4351 hours – using revenue split between SA and SSA as the basis.

§ More local content will be additional to existing content – ie the extra local content will not be a substitute for existing content

§ We estimate that SA local content comprises approximately 14% of SA programming content cost.

We summarise the impact of additional local content in SA on total pay TV margin:

EXHIBIT 25: Additional local content in SA impact on total pay TV margin

Percentage increase in SA local content hours

0 10% 15% 20% 25% 30%

Local content in SA (hours) 4,351 4,786 5,503 6,604 8,255 10,732

Cost (ZAR m) 725 798 917 1 101 1 376 1 789

Pay TV operating cost (ZAR m) 21 324 21 397 21 516 21 700 21 975 22 388

Pay TV EBITDA (ZAR m) 8 933 8 860 8 741 8 557 8 282 7 869

Pay TV EBITDA margin (%) 29.5 29.3 28.9 28.3 27.4 26.0

Sources: BNP Paribas Cadiz Securities estimates



Increased competition in SA pay TV

Top TV continues to struggle

Top TV continues to pose little threat to DSTV in SA, with the company still under business rescue, which commenced in October 2012. In November 2012, Top TV dropped three channels and added one, and in April 2013 it dropped another two channels. Despite fewer channels, monthly subscription fees have not been reduced. A number of potential investors have considered acquiring Top TV including Chinese based Star Times, but the 20% regulatory limitation on foreign direct investment in domestic broadcasters is likely to hamper this deal, in our opinion.

Threat from new technologies such as IPTV – still some way off

Worldwide IPTV is still in its early stages. As at the end of March 2013, there were approximately 79.3m IPTV subscribers worldwide (Point Topic) with subscribers growing 21% y-y to the end of Q1 2013. China is the largest IPTV market with approximately 15.2m IPTV households or 23% of global IPTV subscribers. The top-five IPTV regions in the world are China, France, US, South Korea and Japan.

In our note Vodacom: Voicing Concerns (26 June 2013), we highlighted our opinion that mobile network operators might seek to drive their data revenues by participation in providing streamed content provision including media content. The eagerness to participate in the provision of content could either count for or against Naspers’ DSTV. If, for instance, the MNOs partner with DSTV (who already possess the content licenses) and provide an alternative means of distributing this content, then Naspers stands to benefit from this arrangement. If, however, the MNOs seek to procure their own licensed content, then this will increase the level of competition in the pay TV space. This threat, if any, is likely still a few years off for the following reasons:

§ Appropriate streaming of media content is likely only to gain traction once lower latency LTE has been deployed and is entrenched. The deployment of LTE is still likely to remain held up due to the difficulty in acquiring adequate spectrum.

§ Data pricing is still way too high and the mechanism for pricing is still not conducive to high-volume media streaming. Zero-rated data is a pricing mechanism alluded to by former MTN Group (MTN SJ; BUY; CP ZAR18250) MD Karel Pienaar. Under this pricing regime it is envisaged that subscribers will only be billed for the streaming content they purchase and pay nothing for the actual data. MTN has previously indicated that it intends to launch a commercial IPTV service during the course of 2013 (broadcast engineering, tech central). Given the hold-up in acquiring spectrum so as to deploy adequate LTE, we doubt this will occur this year.

§ Most of the content worth having is likely already licensed by Naspers – these licenses firstly need to expire before other suitors are even allowed to participate in the bidding process.

Even once LTE is entrenched, fixed line technology is still more suitable for video streaming applications. As such, Telkom (TKG SJ; HOLD; CP ZAR1871) likely poses a more immediate threat to DSTV’s direct to the home (DTH) service in terms of IPTV. That said, with the degree to which the MNOs are self-provisioning (laying down their own fibre) at some point the deployment of fibre to the home (FTTH) becomes viable and, as such, the deployment of content, including media, over this fibre becomes realistic. In our opinion this is probably still at least three years out.

Little threat to SA pay TV business from new licensees

In our note TV Turf Wars (25 January 2013), we identified the five pay TV license applicants as follows:

EXHIBIT 26: Individual commercial subscription broadcasting service licensees

Potential licensee Detail FTA / Pay Platform

Close TV Targeting the LGBT sector Pay DTH

Kagiso Educational Pa DTT

Mindset Media Educational Pay DTT

Mobile TV No competing in the DTT / DTH space Pay Mobile

Siyaya Focused on sport (rugby and soccer) Pay DTT

Source: Government Gazette, December 2012

The license applicants will participate in public hearings that commence on 24 July 2013.

All of the licensees, with the exception of Mobile TV, are likely to launch niche channels as opposed to a full general channel bouquet - so on their own, they are unlikely to pose a real threat to DSTV.



Mindset media is already being carried on the Multichoice bouquet.

Programming remains the largest barrier to entry for the new entrants who wish to offer similar programming to DSTV, with most of the premium general entertainment content already having being tied up by Multichoice – this is especially true of sport.

We have previously identified regulatory intervention as a potential threat to the domestic pay TV business. Two issues in particular remain a concern to us – intervention related to content exclusivity and government imposed local content quotas (discussed above).

In May 2013, On Digital Media (parent company of Top TV) requested that the SA Competition Commission investigate Multichoice for anti-competitive behaviour relating to content exclusivity and procurement. The issue arose out of Multichoice’s failure to agree to terms with Top TV on commercial terms to carry Supersport 3 and 4. The complaint is currently still being screened by the Commission. Creating competition in the broadcasting sector remains a key objective of the Department of Communications, and as such remains the biggest threat to Naspers’ pay TV operations in SA. The introduction of policy that forces Multichoice to on-sell its content (especially live sport ) to other broadcasters, or to allow other competing broadcasters to carry certain channels (such as Supersport channels) on their platforms could impact DSTV’s dominance of the SA marketing the future, in our opinion.

Even though the new pay TV licensees on their own present little threat to DSTV in SA, the combination of new niche competitors together with regulatory intervention in forcing content sharing creates a material threat, in our opinion. Niche competitors who are able to concentrate their limited capital on certain market segments and build customised bouquets for that segment using a combination of cherry-picked content from DSTV as well as unknown procured content could erode DSTV’s subscriber base. The lower LSM band in particular might find this attractive – a small channel bouquet, at a low cost, with mostly cheap content and one or two premium sports items such as the English Premier League (EPL) or the Premium Soccer League (PSL) is an example of a combination which might be enticing to the market.

Lessons from abroad

The jostling for position and content in an environment in which broadcasting and telecommunications is starting to converge is not unique to SA. In the UK, British Telecom (BT) is starting to make moves on Sky TV’s dominance of the live sport pay-TV market. BT has approached the UK broadcasting regulator, Ofcom relating to what it deems to be abusive terms regarding the supplying of channels Sky Sports 1 and 2 to BT for broadcasting on its YouView facility (The Daily Telegraph).

The regulation of wholesale content prices is a lot more difficult than it seems. In the UK in 2010, Ofcom attempted to regulate the price at which Sky on-sells its sports channels to other broadcasters. Moreover the enforced pricing regime was based on a per subscriber fee which removed the natural monopoly created by the high cost of programming rights and small subscriber base.

The regulation was met with legal challenges from various sporting bodies including the influential English Premier League, Rugby Football Union and Lawn Tennis Association who argued that the regulation would erode competition for broadcast rights and reduce the incentives for bidders to invest in sports rights. A subsequent appeal by Sky, Virgin Media, BT and the EPL against Ofcom’s 2010 “Wholesale must offer obligation” was eventually overturned in August 2012 by the Competition Appeal Tribunal who disagreed with Ofcom’s interpretation of the facts and conclusion that Sky’s dealings with its peers were unconstructive (Olswang). The biggest difference between the UK and SA situations is that in UK the argument regarding the live programming sports content is about the wholesale pricing of this content, whereas in SA the contention relates to the fact that the dominant broadcaster does not currently on-sell its sporting channels at all.

Persistent weakness in ZAR likely to boost revenue

The exhibit below shows our house view forecast of the USD/ZAR exchange rate for the 12 months ending March 2014. Naspers derives a significant proportion of its revenue from international operations – as such the persistent weakness in the domestic currency is likely to boost revenue.



EXHIBIT 27: Forecast monthly USD/ZAR exchange rate

Source: BNP Paribas Cadiz Securities estimates

Commitment to e-commerce

In its recent results release, management once again reaffirmed its commitment to pursuing an e-commerce strategy. In light of the expensive market prices of e-commerce businesses, there is likely to be a preference for organic growth of the e-commerce platform as opposed to acquisition – however, opportunistic acquisitions will be considered as and when they arise. Over the last five years Naspers has spent approximately USD2.4b on acquisitions – mostly on e-commerce businesses. Despite management’s comments last year that they were observing high market prices on e-commerce related businesses, Naspers spent USD634m on acquisitions during FY13.

Summary

§ Finished programming is about 5-10 times cheaper than locally commissioned and produced content. As such, increases to local content quotas could significantly impact margin.

§ On their own, the new potential broadcasting licensees harbour little threat to DSTV’s dominance in SA.

§ We believe that there could be more regulatory intervention around the wholesaling of programming content – which could significantly increase the ability of the new licensees to compete. This is, however, still likely some years off.

§ Given the lack of available spectrum, the mobile operators are unlikely to be able to deploy IPTV. Even once spectrum is available and high-speed LTE is more widespread the technology still isn’t ideal or cost-effective for this application – fixed-line connectivity is still far superior in this regard.

Segmental revenue contribution

The exhibit below summarises the trend in Naspers’ historical segmental revenue contribution as well as our forward looking estimates.

9.18 9.11

9.37

10.03 10.10 10.20 10.25

10.35 10.40 10.50

10.40 10.30 10.25

8.00

8.50

9.00

9.50

10.00

10.50

11.00 Mar-

13

Apr-

13

May-

13

Jun-1

3

Jul-13

Aug-

13

Sep

-13

Oct-1

3

Nov-

13

Dec

-13

Jan-1

4

Feb

-14

Mar-

14

(USD/ZAR)



EXHIBIT 28: Historical and segmental contribution to Naspers revenue

Sources: Naspers; BNP Paribas Cadiz Securities estimates

§ As of FY13, the internet segment overtook the pay TV segment in terms of revenue contribution. The internet and pay TV segment now contributes 45% and 38% to group revenue on an economic interest basis respectively.

§ Based on our modelling, we expect the internet segment to grow its contribution to revenue to 58% by FY14 and 61% by FY15.

§ Pay TV contribution we estimate at 29% in FY14 declining to 27% by FY15.

§ Print contribution we estimate at 12% in FY14 declining to 10% by FY15.

§ We forecast revenue growth of 80% for the internet segment in FY14 and 10% revenue growth for the pay TV segment.

The changing revenue contribution profile of Naspers reflects management’s sentiment of the company becoming an internet business with some good media assets.

Changes to our modelling assumptions

As we do not cover Tencent or Mail.ru, our model makes use of Bloomberg consensus estimates for Tencent’s revenue and EBITDA. The consensus estimates are pulled into the model in ZAR.

As such, the estimates reflect both the change in consensus as well as the weakening of the domestic currency.

We update our revenue estimates for Tencent and mail.ru as follows:

EXHIBIT 29: Change in Associate consensus revenue and earnings

From FY14 To FY14 From FY15 To FY15

(ZAR m) (ZAR m) (ZAR m) (ZAR m)

Tencent revenue 27,718 41,635 34,949 51,441

Tencent EBITDA 10,644 14,844 13,146 17,324

Mail.ru revenue 2,170 2,998 2,614 3,486

Mail.ru EBITDA 951 1,538 1,153 1,796

Source: Bloomberg

Earnings revision

In light of our changes to our modelling assumptions, we revise our earnings as follows:

Core HEPS changes

FY14: ZAR24.25 to ZAR30.65

FY15: ZAR28.96 to ZAR36.33

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010

2011

2012

2013

2014F

2015F

2016F

2017F

2018F

2019F

2020F

Pay TV Internet Print Technology



FY16: Introduce FY16 Core HEPS of ZAR41.35

Dividends

We forecast dividends for Naspers as follows:

FY14: ZARc 442, FY15: ZARc 535, FY16: ZARc 617

The exhibit below shows the historical and forecast dividends for Naspers.

EXHIBIT 30: Historical and forecasted DPS

Sources: Naspers; BNP Paribas Cadiz Securities estimates

DCF valuation

Given our changes to earnings detailed above, we employ a two-stage DCF model, based on our forecast of Naspers’ free cash flow to the firm (FCFF) over this period to estimate the stock’s intrinsic value.

Key inputs into this valuation include the following.

EXHIBIT 31: DCF Valuation inputs

Stage 1 Terminal

(%) (%)

Risk-Free Rate 5.5 8.5

Equity Premium 6.0 6.0

Cost of Debt 6.0 9.0

Beta 96 96

WACC 10.1 13.0

Terminal Growth Rate

7.0

Sources: Bloomberg; Naspers; BNP Paribas Cadiz Securities

25 3070

120156

180207

235270

335385

442

535

617

0

100

200

300

400

500

600

700

Mar 2003

Mar 2004

Mar 2005

Mar 2006

Mar 2007

Mar 2008

Mar 2009

Mar 2010

Mar 2011

Mar 2012

Mar 2013

Mar 2014

Mar 2015

Mar 2016

(DPS)



On this basis we arrive at a DCF valuation as follows.

EXHIBIT 32: DCF Valuation Model

2014E 2015E 2016E 2017E 2018E 2019E 2020E Terminal

(ZAR m) (ZAR m) (ZAR m) (ZAR m) (ZAR m) (ZAR m) (ZAR m) (ZAR m)

Net Income 11,189 13,663 15,855 19,002 22,651 26,813 31,501

add: Non-cash charges 4,081 4,260 4,501 4,735 5,022 5,271 5,552

add: After tax net interest 895 1,062 1,226 1,379 1,514 1,659 1,816

less: Capex (3,542) (4,136) (4,354) (4,944) (5,023) (5,501) (5,945)

less: Working Capital Changes (345) 116 466 197 76 (69) (300)

FCF 12,279 14,966 17,694 20,370 24,238 28,173 32,624 583,408

PV of CFs 11,477 12,711 13,655 14,283 15,442 16,309 17,160 227,794

Sum of PV CFs 328,831

Less MV of Debt (2,392)

326,439

Target Price 829.00


Our DCF based TP of ZAR829 is supported by our SoTP valuation of ZAR854-938. DCF remains the primary valuation methodology on which we base our recommendation.

In summary, we believe that Naspers is likely to continue benefiting from Tencent’s strong positioning in the Chinese internet market, especially with regards to gaming, the growth in e-commerce and the ongoing adoption of mobile internet usage. We also believe that despite the increasing risk of regulatory intervention in the domestic pay tv space, which could have a negative impact on pay TV margins and potentially threaten Naspers’ near monopoly on premium content (especially live premium sport) that DSTV is likely to remain the dominant player in the pay TV market in SA over the medium term. Given our TP of ZAR829 and the fact that the counter is currently trading around ZAR799, it appears as though the market has already priced in the growth potential of the stock. The current implied upside of 5% lies below our BUY threshold of 10% relative to the current market price. As such, we downgrade our recommendation on Naspers from a BUY to a HOLD.

Risks to our valuation

Upside risks to our valuation include lower-than-expected competition in the pay TV segment, and further outperformance of Tencent and mail.ru relative to consensus.

Downside risks include poorer-than-expected performance of Tencent and Mail.ru relative to consensus and more aggressive regulatory intervention in pay TV, specifically related to significant increases in local content quotas and forced implementation of wholesale content sharing.



Appendix: Summary of model assumptions

The exhibit below summarises our revenue and EBITDA assumptions for the Pay TV segment.

EXHIBIT 33: Pay TV revenue trend assumption EXHIBIT 34: Pay TV EBITDA trend assumptions



The exhibit below summarises our revenue and EBITDA assumptions for the Print Media segment.

EXHIBIT 35: Print Media revenue trend assumptions EXHIBIT 36: Print Media EBITDA trend assumptions



The exhibit below summarises our revenue and EBITDA assumptions for the Internet segment.

EXHIBIT 37: Internet revenue trend assumptions EXHIBIT 38: Internet EBITDA trend assumptions



0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F

(ZAR m) SA SSA

0

2,000

4,000

6,000

8,000

10,000

12,000

2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F

(ZAR m) SA SSA

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F

(ZAR m) Media24 Abril MIH Print

0

200

400

600

800

1,000

1,200

1,400

1,600

2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F

(ZAR m) Media24 Abril MIH Print

0

50,000

100,000

150,000

200,000

250,000

2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F

(ZAR m) Tencent Mail.ru e-Commerce Other

(10,000)

0

10,000

20,000

30,000

40,000

50,000

60,000

2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F

(ZAR m) Tencent Mail.ru e-Commerce



Financial statements Naspers Ltd

Profit and Loss (ZAR m) Year Ending Mar 2012 2013 2014E 2015E 2016E

Revenue 39,487 50,429 59,029 68,932 79,169

Cost of sales ex depreciation (20,863) (27,852) (31,188) (36,420) (41,829)

Gross profit ex depreciation 18,624 22,577 27,841 32,512 37,340

Other operating income 0 0 0 0 0

Operating costs (11,664) (14,956) (19,369) (22,253) (22,253)

Operating EBITDA 6,960 7,621 8,472 10,258 15,087

Depreciation (1,222) (1,435) (2,272) (2,477) (2,745)

Goodwill amortisation (1,088) (1,088) (1,310) (1,283) (1,256)

Operating EBIT 4,650 5,098 4,891 6,498 11,085

Net financing costs (697) (1,316) (1,526) (1,766) (2,000)

Associates 3,869 9,001 13,120 15,286 18,209

Recurring non operating income 0 0 0 0 0

Non recurring items (2,282) (3,031) (500) (500) (500)

Profit before tax 5,540 9,752 15,984 19,519 26,795

Tax (2,059) (2,552) (4,795) (5,856) (6,795)

Profit after tax 3,481 7,199 11,189 13,663 20,000

Minority interests (587) (701) (1,163) (1,420) (1,647)

Preferred dividends 0 0 0 0 0

Other items 0 0 0 0 0

Reported net profit 2,894 6,498 10,026 12,244 18,352

Non recurring items & goodwill (net) 3,370 4,119 1,810 1,783 1,756

Recurring net profit 6,264 10,618 11,836 14,027 20,109

Per share (ZAR)

Recurring EPS * 16.12 27.57 30.65 36.33 52.08

Reported EPS 7.70 16.88 25.97 31.71 47.53

DPS 3.35 3.85 4.42 5.35 6.17

Growth

Revenue (%) 19.4 27.7 17.1 16.8 14.9

Operating EBITDA (%) (2.6) 9.5 11.2 21.1 47.1

Operating EBIT (%) (5.8) 9.6 (4.1) 32.9 70.6

Recurring EPS (%) 7.6 71.0 11.2 18.5 43.4

Reported EPS (%) (45.1) 119.1 53.9 22.1 49.9

Operating performance

Gross margin inc depreciation (%) 44.1 41.9 43.3 43.6 43.7

Operating EBITDA margin (%) 17.6 15.1 14.4 14.9 19.1

Operating EBIT margin (%) 11.8 10.1 8.3 9.4 14.0

Net margin (%) 15.9 21.1 20.1 20.3 25.4

Effective tax rate (%) 37.2 26.2 30.0 30.0 25.4

Dividend payout on recurring profit (%) 20.8 14.0 14.4 14.7 11.9

Interest cover (x) 13.8 11.5 12.7 13.1 15.3

Inventory days 43.5 43.0 44.6 40.3 38.7

Debtor days 28.8 26.8 27.3 27.1 27.3

Creditor days 41.8 46.2 46.7 42.3 42.7

Operating ROIC (%) 87.5 71.9 53.5 57.0 77.5

Operating ROIC - WACC (%) - - - - -

ROIC (%) 17.0 22.8 25.1 27.1 32.5

ROIC - WACC (%) - - - - -

ROE (%) 14.2 21.0 20.1 19.9 24.0

ROA (%) 10.0 13.7 13.1 13.6 16.5

*Pre exceptional, pre-goodwill and fully diluted

Revenue By Division (ZAR m) 2012 2013 2014E 2015E 2016E

Pay TV 24,093 28,872 31,778 34,760 37,477

Internet 19,192 34,587 62,211 78,855 98,054

Print 12,071 11,932 12,441 13,094 13,782

Technology 1,166 1,385 1,454 1,527 1,603

Less: Associates (17,035) (26,347) (48,855) (59,303) (71,747)

Sources: Naspers Ltd; BNP Paribas Cadiz Securities estimates



Naspers Ltd

Cash Flow (ZAR m) Year Ending Mar 2012 2013 2014E 2015E 2016E

Recurring net profit 6,264 10,618 11,836 14,027 20,109

Depreciation 1,222 1,435 2,272 2,477 2,745

Associates & minorities (3,869) (3,875) (3,936) (4,586) (5,463)

Other non-cash items 5,644 7,022 5,608 6,026 6,501

Recurring cash flow 9,261 15,200 15,779 17,943 23,892

Change in working capital 97 1,266 345 (116) (466)

Capex - maintenance 0 0 0 0 0

Capex - new investment (1,837) (2,767) (3,542) (4,136) (4,354)

Free cash flow to equity 7,521 13,699 12,582 13,691 19,072

Net acquisitions & disposals (1,390) 0 0 228 301

Dividends paid (1,056) (2,046) (2,725) (3,223) (3,831)

Non recurring cash flows (3,900) (3,036) (3,364) (3,285) (3,286)

Net cash flow 1,175 8,617 6,494 7,411 12,256

Equity finance 0 0 0 0 0

Debt finance 114 2,010 89 (40) (156)

Movement in cash 1,289 10,627 6,583 7,371 12,100

Per share (ZAR)

Recurring cash flow per share 24.65 39.47 40.87 46.47 61.88

FCF to equity per share 20.02 35.58 32.59 35.46 49.40

Balance Sheet (ZAR m) Year Ending Mar 2012 2013 2014E 2015E 2016E

Working capital assets 8,695 11,119 12,479 14,342 16,269

Working capital liabilities (11,004) (14,590) (15,261) (16,648) (17,792)

Net working capital (2,309) (3,471) (2,782) (2,306) (1,523)

Tangible fixed assets 8,879 14,056 15,326 16,985 18,594

Operating invested capital 6,570 10,585 12,544 14,679 17,072

Goodwill 21,768 26,194 25,660 25,126 24,594

Other intangible assets 0 0 0 0 0

Investments 30,659 35,041 40,991 47,368 54,553

Other assets 1,281 792 1,485 1,803 2,085

Invested capital 60,278 72,612 80,679 88,975 98,303

Cash & equivalents (9,996) (16,334) (22,307) (29,112) (36,534)

Short term debt 1,613 2,298 2,298 2,298 2,298

Long term debt * 13,344 20,852 21,881 22,961 24,095

Net debt 4,961 6,816 1,871 (3,853) (10,141)

Deferred tax 1,315 1,336 3,063 3,740 4,340

Other liabilities 4,426 8,607 9,242 9,939 10,703

Total equity 47,515 53,741 64,314 76,863 90,996

Minority interests 2,061 2,112 2,189 2,287 0

Invested capital 60,278 72,612 80,679 88,975 95,897

* includes convertibles and preferred stock which is being treated as debt

Per share (ZAR)

Book value per share 124 139 167 199 236

Tangible book value per share 66.93 71.34 100 134 172

Financial strength

Net debt/equity (%) 10.0 12.2 2.8 (4.9) (11.1)

Net debt/total assets (%) 6.1 6.6 1.6 (2.9) (6.6)

Current ratio (x) 1.5 1.6 2.0 2.3 2.6

CF interest cover (x) 14.4 13.5 11.6 11.1 12.7

Valuation 2012 2013 2014E 2015E 2016E

Recurring P/E (x) * 49.6 29.0 26.1 22.0 15.4

Recurring P/E @ target price (x) * 51.4 30.1 27.0 22.8 15.9

Reported P/E (x) 103.8 47.4 30.8 25.2 16.8

Dividend yield (%) 0.4 0.5 0.6 0.7 0.8

P/CF (x) 32.4 20.3 19.6 17.2 12.9

P/FCF (x) 39.9 22.5 24.5 22.5 16.2

Price/book (x) 6.5 5.7 4.8 4.0 3.4

Price/tangible book (x) 11.9 11.2 8.0 6.0 4.6

EV/EBITDA (x) ** 28.7 19.0 14.6 12.1 9.1

EV/EBITDA @ target price (x) ** 29.7 19.7 15.1 12.6 9.4

EV/invested capital (x) 5.2 4.4 3.9 3.5 3.1

* Pre exceptional, pre-goodwill and fully diluted ** EBITDA includes associate income and recurring non-operating income

Sources: Naspers Ltd; BNP Paribas Cadiz Securities estimates



History of change in investment rating and/or target price

Naspers Ltd (NPN SJ)

Ian.Brink started covering this stock from 01-Nov-2012 Price and TP are in local currency Valuation and risks: Upside risks to our DCF-based valuation include lower-than-expected competition in the pay TV segment, and further outperformance of Tencent and mail.ru relative to consensus. Downside risks include poorer-than-expected performance Tencent and Mail.ru and more aggressive regulatory intervention in pay TV. Sources: Bloomberg; BNP Paribas

Date Reco TP

1-Nov-12 BUY 62,000.00

20,151

30,151

40,151

50,151

60,151

70,151

80,151

Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13

(ZAR cts) Naspers Ltd Target Price



Disclaimers and Disclosures

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IMPORTANT DISCLOSURES The disclosure column in the following table lists the important disclosures applicable to each company that has been rated and/or recommended in this report:

Company Disclosure (as applicable)

- -

BNP Paribas represents that: 1. Within the past year, it has managed or co-managed a public offering for this company, for which it received fees. 2. It had an investment banking relationship with this company in the last 12 months. 3. It received compensation for investment banking services from this company in the last 12 months. 4. It beneficially owns 1% or more or the market capitalization of this company. 5. It makes a market in securities in respect of this company. 6. The analyst(s) or an individual who assisted in the preparation of this report (or a member of his/her household) has a financial interest position in

securities issued by this company or derivatives thereof. 7. The analyst (or a member of his/her household) is an officer, director, or advisory board member of this company.

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All share prices are as at market close on 18 July 2013 unless otherwise stated.



RECOMMENDATION STRUCTURE

Stock Ratings Stock ratings are based on absolute upside or downside, which we define as (target price* - current price) / current price. BUY (B). The upside is 10% or more. HOLD (H). The upside or downside is less than 10%. REDUCE (R). The downside is 10% or more.

Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on market price and the formal recommendation.

* In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. However, if the analyst doesn't think the market will reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our recommendation is an assessment of the mismatch between current market price and our assessment of current fair value.

Industry Recommendations Improving (é): The analyst expects the fundamental conditions of the sector to be positive over the next 12 months. Neutral (çè): The analyst expects the fundamental conditions of the sector to be maintained over the next 12 months. Deteriorating (ê): The analyst expects the fundamental conditions of the sector to be negative over the next 12 months.

Country (Strategy) Recommendations Overweight (O). Over the next 12 months, the analyst expects the market to score positively on two or more of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity.

Neutral (N). Over the next 12 months, the analyst expects the market to score positively on one of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity.

Underweight (U). Over the next 12 months, the analyst does not expect the market to score positively on any of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity.

RATING DISTRIBUTION (as at 19 July 2013)

Total BNP Paribas coverage universe 659 Investment Banking Relationship (%)

Buy 348 Buy 5.5

Hold 209 Hold 1.4

Reduce 102 Reduce 2.9

Should you require additional information concerning this report please contact the relevant BNP Paribas research team or the author(s) of this report.

© 2013 BNP Paribas Group

Naspers Ltd-190713 Final

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