Thursday, 17 March 2011

Collective Insights
Minutes from our morning meeting

o Naspers [NPN 36900cps] / Tencent [700 HK 193.2cps] – Tencent dropped 9.8% at one stage this morning, the most in two years, after
management commented that earnings growth is certain to slow. This comment was made during the release of Q4 results, which saw operating
profit increase by 46% and was in line with consensus expectations. Tencent’s instant messaging service had 647.6m active user accounts at the
end of December, up from 636.6m the previous quarter. Tencent increased its share of China’s online games market to 29.1% in 2010 from 21.1%
a year earlier. Tencent will step up its international expansion after agreeing to buy Los Angeles-based online-game publisher, Riot Games, last
month. Tencent has a strong balance sheet and CNY17.8b cash to make offshore investments. We believe the market has overreacted to the
“growth” statement as it is obvious that the historical level of growth cannot be sustained. Moreover, consensus EPS growth figures for Tencent are
well below historical figures and we believe the sell-off has presented an attractive entry point for Naspers (owns 35.2% of Tencent) investors.
History is also repeating itself as we witnessed a similar scenario last year after the Q2 Tencent results - and the Naspers share has rallied strongly
after dropping to R250. The investment case is simple: Naspers is on the cutting edge of digital media technology in developing countries and the
earnings profile is comprised mainly of high growth internet services and resilient pay TV annuity. The major challenges for the business remain the
monetisation of its services across one of, arguably, the biggest client bases on the planet and the development of its internet offering into a
sustainable long-term business model. Naspers is a high beta play but we believe the counter offers excellent electronic media exposure to some of
the fastest growing emerging markets in the world, with the number of people using the internet over the next decade expected to triple. Naspers
remains on our preferred share list and we are buyers of the share on material share price weakness.

Tencent
40% Discount to Consensus Target Price
30%
20%
10%
0%
-10%
-20%
Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10
Discount Average 1+Std Dev 1-Std Dev
Source: Independent Securities Research, Bloomberg

o Cipla Medpro [CMP 707cps] – Generic drug distributor and manufacturer Cipla Medpro released FY results today. Normalised HEPS increased by
29% to 52.3c and all other key operating metrics pointed in the right direction. Free cash flow generation from operations was much improved on
the previous year end although we would like to see the company reduce the number of stock days. This high number negates to some degree the
180-day funding arrangement with Cipla India. A final dividend of 6cps was declared bringing the total dividend for the year to 11cps, a cover of
4x. However, we were most interested in the segmental analysis which indicated that the manufacturing division made an operating loss of R29m,
mainly because the plant is not running close to capacity yet. This is the area which is likely to drive earnings growth over the medium term.
January was breakeven for the first time ever. We expect manufacturing to be profitable from this year as Cipla Medpro will manufacture a
significant portion of the 15% of ARV tender they won and, with both WHP and FDA accreditation pending, manufacturing for the rest of Africa is
likely to increase substantially. Cipla Medpro has an exciting pipeline of registrations pending approval and will add oncology to its portfolio. Cipla
Medpro is trading on a forward P/E ratio of 9.1x and a DY of 2.4%, which is lower than its sector peers – possibly because the relationship with
Cipla India is an opportunity but also a threat as they are the dominant supplier to the business. We calculate an IRR of 20% for Cipla Medpro and
continue to advocate a long position in the counter as the company is growing market share in an industry with structural long-term tailwinds.

Sector Forward P/E Ratios Sector Forward Dividend Yields

5% 4.4%
15.0 13.5
3.7%
11.4 10.8 4%
12.0 2.9%
9.1 9.1
9.0 7.6 3% 2.4%
1.7%
6.0 2% 1.3%

3.0 1%
0.0 0%
Cipla Aspen Adcock Cipla Aspen Adcock

PE FY1 PE FY2 DY FY1 DY FY2

Source: Independent Securities Research, INet-Bridge

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