Tencent's Top Shareholder Prosus Embraces Tech's New Normal

The cooling off of technology markets has now reached Prosus, the Amsterdam-listed investment company that has a $94 billion stake in Chinese internet giant Tencent. This company sometimes seems to be insulated from wider trends, but that is no longer the case.

Prosus reported Wednesday that its half-year consolidated trading losses more than doubled to $449 million. The company attributed the losses to continued investment in its roughly $30 billion portfolio of e-commerce ventures, which are engaged in cash-hungry businesses such as food delivery and fintech. Prosus signaled that this would be the peak period for cash burn as the company adapts to the rising cost of capital by cutting costs and shifting its operating focus toward profitability. According to Prosus, its e-commerce investments need another two years to break even.

Bob van Dijk, CEO of the company, said that they have been accelerating some investments this year in order to achieve greater scale, but that this is actually part of a longer-term plan to refocus on profitability. He likened the effort to changing the direction of a speeding car: To avoid an accident, he needed to get the car in the right road position and pump the brakes before pulling on the wheel.

He said in an interview that this is the point where we turn the corner.

Prosus doesn't have the same immediate cash pressures as many other companies do in a difficult funding environment. This is because its vast Tencent stake is like permanent capital on its balance sheet. This stake supplied Prosus with $565 million in dividends in the period to cover losses elsewhere.

Prosus has a lot of cash on its balance sheet, and it can use that cash to make acquisitions. In August, it agreed to pay up to 1.8 billion euros to buy out its partner in iFood, Brazil’s answer to DoorDash.

Just Eat Takeaway.com, a struggling food-delivery company, is being bought by Uber Eats. The deal values Just Eat Takeaway.com at 1.21% of its shares.

Only last year, the company had rejected a €2.3 billion offer.

Investors have been critical of Prosus for trading at a significant discount to book value. In June, the company announced a share buyback program funded by sales of Tencent stock, which has helped to narrow the discount to 37%. This trend could continue, making Prosus an attractive investment for those who are bearish on Tencent.

If the company also addresses its overly complex structure, it will be in a better position to compete in the market. Prosus is majority-owned by listed South African holding company Naspers, which gives it a strong financial backing. However, the company's structure is needlessly complex, which hinders its ability to compete effectively.

Mr. van Dijk said he is working on creating a double discount-closing trade. This would provide a discount to both the buyer and the seller, making it a more attractive option for both parties.

The decision to gradually reduce Tencent's stake is another reason, alongside the rising cost of capital and the deteriorating consumer environment, why Prosus needs to stop losing money in its e-commerce businesses sooner rather than later. It is still early days, but the likely endgame for this well-run but awkwardly-constructed technology company is finally becoming a bit clearer.