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Our Tencent(s) on VIE structures

As at 28 February 2019, Naspers made up just over 18% of the FTSE/JSE All Share Index. Because of its dominance, including or excluding the share will have a significant impact on an investment portfolio. Therefore, it is worthwhile to spend adequate time understanding how the company operates and its underlying entities.

One of the issues often raised with Naspers is its significant shareholding in Chinese technology company, Tencent. Tencent holds its internet operations through a Variable Interest Entity (VIE) in Hong Kong – an opaque ownership structure commonly used by Chinese companies who seek foreign investment but operate in highly regulated industries. 

Using a VIE, Tencent effectively operates through a series of contracts which result in foreign ownership of a Chinese business without the usual transfer of equity or voting rights. Tencent has entered into a group of contracts with Tencent Computer and Shiji Kaixuan, which are domiciled in China and own the licences to provide internet content or information services and other telecommunications value-added services. Under these contracts, Tencent is entitled to the full economic benefit of the business and operations of these entities. A VIE is prohibited from distributing profits to registered owners and the registered owner of a VIE is barred from transferring or encumbering their equity interest in the VIEs without prior written consent from Tencent’s board of directors. 

While a VIE structure is not without risks, for Tencent it does have several mitigating factors, including: 

VIE structures are well established, and have encountered few significant issues since they were first introduced in 2000. While this offers a level of comfort, it remains the responsibility of Naspers’ investors to assess the risks and rewards of these factors, amongst others, in determining the value the share could add to their portfolio over the long term.

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