Is This Stock the Best Way to Play Chinese AI?

Yahoo

8 hours ago

While restricted from the latest and greatest chips for now, over half the world's AI researchers are in China.
As such, growth investors should try to have some China-related AI exposure in their portfolios.
Here's how a South African stock may offer the best way to play Chinese AI.
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Would you believe that the best way to play China's AI ambitions may be a South African stock?
Artificial intelligence has the potential to change the economy. As such, investors should have exposure to some AI companies in their portfolios -- and that includes Chinese exposure. Even Nvidia CEO Jensen Huang recently noted that China is home to half of the world's AI researchers. And the January unveiling of the groundbreaking DeepSeek R1 model showed how China is able to innovate cutting-edge AI, even with limited silicon access.
Nevertheless, investing in China carries risks pertaining to its economy, its government, and the market mechanics of owning Chinese stocks. That's why the best way to expose oneself to Chinese AI may be South African holding company Naspers (OTC: NPSNY).
It's still very early in the AI races, and in truth, it's hard to know who is going to win out. It could be an upstart AI lab such as DeepSeek in China or OpenAI in the U.S., or one of the existing big tech giants.
In this investor's opinion, the existing incumbents are the best bet. These companies have huge technological and financial resources to invest in AI, and AI should also enable existing large businesses to boost revenue and lower costs through better automation and data science.
That's why Tencent (OTC: TCEHY) seems like good bet to be a big winner from Chinese AI. Tencent has the largest social media platform in China in WeChat, with more than 1.4 billion users. It's also the largest video game publisher in the China, the largest video and music streaming company, one of the two large digital payments companies, and one of China's cloud computing giants.
In addition, Tencent is building its own large model, called Hunyuan, which could lead to vast new AI opportunities if it ends being more performant than DeepSeek and other competitors over time.
Tencent stock doesn't trade on U.S. stock exchanges, but it does trade over the counter as an American depositary receipt. However, a better way to play Tencent may be through its largest shareholder, European-domiciled Prosus (OTC: PROSY), which owns more than 23% of Tencent's stock. And the best way to invest in Prosus may be in its largest shareholder, Naspers, which owns 43% of Prosus.
Naspers is a 110-year-old South African media company that was fortunate enough to invest in Tencent when it was just a startup in 2001. That investment eventually grew to be worth hundreds of billions, dwarfing Naspers' original business.
Naspers then sold portions of its Tencent stake over time, investing in new businesses across food delivery, fintech, classifieds, e-commerce, ed-tech, and other tech startups.
However, Naspers began to trade at a huge discount to the value of not only its net assets but also its Tencent stake alone. Management attributed that growing discount to its large size relative to the Johannesburg Stock Exchange. The thinking was that large index funds cap their asset weightings, which meant they had to sell Naspers stock once it reached a certain-sized allocation.
In 2019, Naspers created Prosus, a new entity it listed on the larger Euronext Exchange in Amsterdam, and spun it off to shareholders. Today, Naspers owns about 43% of Prosus, which owns all of Naspers' assets outside of South Africa, while Naspers owns some small additional South African assets on its own.
The plan didn't really work, though, as, Prosus still trades at a 30% discount its total net assets and even a 9% discount to the value of its Tencent stake alone. Meanwhile, Naspers trades at an even bigger 36% discount to the value of its assets, which is mainly just its 43% stake in Prosus.
Owning Tencent at a discount is an attractive proposition, but of course it won't make much of a difference if the valuation gap never closes. That being said, a new development at Prosus could change this dynamic.
Before this year, Prosus' businesses were free cash flow negative, so the company was dependent on Tencent stock sales and Tencent's dividend for cash for funding. However, in fiscal 2025, which ended in March, Prosus' non-Tencent businesses turned free cash flow positive for the first time, excluding Tencent's dividend, generating $36 million in positive free cash flow and improving free cash flow by nearly $1 billion over the past three years.
Prosus also has a new CEO in Fabricio Bloisi, who took over the job exactly one year ago. Bloisi is an entrepreneur and the very successful former CEO of iFood, now the largest food delivery company in Brazil, which Prosus fully acquired back in 2022.
Having a proven startup operator is a contrast with Prosus' prior leadership, and recent results appear to show Bloisi is raising the bar on execution.
Before today, if Prosus wanted to buy a company or repurchase its stock at a big discount, it would have to sell part of its Tencent stake. That probably played into the "conglomerate discount," as investors may not have liked the capital allocation of selling a high-quality business in Tencent to buy more risky and unprofitable startups.
However, if the other operating businesses continue to grow positive free cash flow outside Tencent, that could change sentiment. Prosus wouldn't have to sell as much or any Tencent stock and could benefit from future compound earnings growth.
If a Prosus/Naspers valuation rerating occurs, that could make Prosus and/or Naspers the most attractive way to play Tencent -- and with it, the growth of Chinese AI.
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Billy Duberstein and/or his clients have positions in Naspers and Prosus. The Motley Fool has positions in and recommends Nvidia and Tencent. The Motley Fool has a disclosure policy.
Is This Stock the Best Way to Play Chinese AI? was originally published by The Motley Fool