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Mongolian Growth Group


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I lived in Mongolia for a summer to do research so I reached out to one of the managers to hear about what it is like now. It seems as though they are having a good time out there and there are bargains to be had in real estate.  That being said, I couldn't wrap my head around the multiple to assets that the shares trade. As you would expect, I also find it hard to wrap my head around the ridiculous GDP growth (+14.3% in the first half of 2011 alone). At worst, it is a fun company to follow and an interesting country to read about.

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Didn't Kuppy write an article about Mongolia? What caught my eye was the 15% interest rate offered in their banks.

 

BeerBaron

 

He actually runs the group.

 

http://www.mongoliagrowthgroup.com/management.html

 

"Harris Kupperman

Chairman, Chief Executive Officer & President

 

- President of Praetorian Capital, a small-cap focused hedge fund, for the past 9 years"

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That is a crazy valuation why in hell would I pay 13xNAV for a fund that just started? Yes Mongolia is prone for good growth but that does not justify that the hard work these guys have put is worth 60M$.

 

BeerBaron

 

Maybe it is Harris Kupperman running the fund. I would say the "Kuppy" premium is built into the stock price.

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That is a crazy valuation why in hell would I pay 13xNAV for a fund that just started? Yes Mongolia is prone for good growth but that does not justify that the hard work these guys have put is worth 60M$.

 

BeerBaron

 

Maybe it is Harris Kupperman running the fund. I would say the "Kuppy" premium is built into the stock price.

 

You can get Dalton at Altius 20% growth for the last 11 years below NAV.

 

You can get Watsa at FFH at BV.

 

You can get Buffett at 1.3BV ... a lot less if you put FCF metrics on the operating businesses.

 

In order to grow the capital from 4M to the current market cap you would need a 13 bagger!!!

 

There is something we are missing here...

 

BeerBaron

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Calonego is also very much a part of YAK, but I doubt if he's going to answer any questions here.  You guys are welcome to ask him about the company at our next Fairfax Dinner which he's attended since day one.  I'm sure he'll be happy to entertain any questions.  Cheers!

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I've been invested in YAK since the first financing. They recently raised $20 million at $3.51 so the P/NAV is much lower than what you're suggesting. You're also paying up for a much smaller company and a much higher domestic GDP growth rate than the other companies you mentioned. Having said that, it is much riskier.

 

I've known Calonego for quite a while now and Kuppy for about a year. These are two really impressive young men who are exactly the type of owner/operators who I enjoy investing alongside. They don't pay themselves any salaries and invest at the same terms as everyone else (excl. the initial seed money). They don't pay themselves bonuses or grant themselves options, etc. They make money from share price appreciation and have a significant amount of their own capital in the company. They also have some of the sharpest business minds I've come across.

 

They've got some very interesting things planned, including building a P&C company from scratch (although with highly experienced people) and buying up chunks of Ulaanbaatar. It's impossible to value based on the books and is very much a bet on Kuppy and Jordan and their judgement.

 

You can gain a little more colour by reading the monthly posts on their web site or some of the other posts on the adventuresincapitalism site.

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I've been invested in YAK since the first financing. They recently raised $20 million at $3.51 so the P/NAV is much lower than what you're suggesting. You're also paying up for a much smaller company and a much higher domestic GDP growth rate than the other companies you mentioned. Having said that, it is much riskier.

 

I've known Calonego for quite a while now and Kuppy for about a year. These are two really impressive young men who are exactly the type of owner/operators who I enjoy investing alongside. They don't pay themselves any salaries and invest at the same terms as everyone else (excl. the initial seed money). They don't pay themselves bonuses or grant themselves options, etc. They make money from share price appreciation and have a significant amount of their own capital in the company. They also have some of the sharpest business minds I've come across.

 

They've got some very interesting things planned, including building a P&C company from scratch (although with highly experienced people) and buying up chunks of Ulaanbaatar. It's impossible to value based on the books and is very much a bet on Kuppy and Jordan and their judgement.

 

You can gain a little more colour by reading the monthly posts on their web site or some of the other posts on the adventuresincapitalism site.

 

Very interesting. Thanks for your thoughts.

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  • 1 year later...

Is anyone still following this? 

 

I did a quick back of the envelope calculation for the $/SQFT for the company.  Assuming no value for the insurance company (let's just go along for now)

 

There are 277k sqft of real estate including redevelopment square footage 

 

With 34.1 mm shares outstanding and at 4.04 Cad per share, the total market cap is $137mm Canadian dollars.  This implies a valuation of $494 per square foot.  Put this in perspective.

 

Manhattan residential is about $1,000 for the generic stuff in NYC

 

Replacement cost and transactions for non-manhattan retail is typically $150-$300/square foot.  I've seen comps in the $60-$100 for distressed stuff as well.  Manhattan retail can sell for in excess of $10,000/square foot.  Keep in mind, Mongolia Growth uses square meter, to covert multiple by 10x to get to a square foot number. 

 

From a rental revenue perspective, the 9 month rental figure is 1.174mm.  Annualized, this would imply a 87x rental multiple, when the US trades at 10-12x rental multiples.  Obviously, there are square footage that aren't generating income. 

 

I've seen emerging market real estate go parabolic, i.e. China.  But, the $/SQFT is 1/2 of manhattan real estate, I don't know how much more upside there could be.  If they were using leverage, then there could be significant upside.  This is clearly not the case.  I doubt leverage makes sense since the interest rate in Mongolia is higher than 10% and the yield on RE is about the same. 

 

 

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MGG piqued my interest last year and it wound up where all the ideas have ended up, if a favourites folder and partially forgotten about. 

I just started looking again this week oddly enough but got sidetracked again, this time with Sandstorm Gold. 

................I'm in need of better time management obviously.  :D

 

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I spent some time on this one a month ago and also found the valuations extreme.  The case seems to rest on converting the real estate to high-rises.  If they already had the high-rises then it would be a bargain.  It seems to me that building these things when the real estate market is overheated is going to be expensive to the point of removing much of the value added.  I gave up and threw it in the too expensive category.

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  • 6 months later...

They now consider a disposition of their insurance unit: http://mongoliagrowthgroup.com/?p=2050

 

Management of MGG believes that a disposition of Mandal will allow MGG to focus its energy, corporate resources and capital on its core real estate leasing business with the goal of creating the most successful institutional property company in the rapidly growing economy of Mongolia.
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They now consider a disposition of their insurance unit: http://mongoliagrowthgroup.com/?p=2050

 

Management of MGG believes that a disposition of Mandal will allow MGG to focus its energy, corporate resources and capital on its core real estate leasing business with the goal of creating the most successful institutional property company in the rapidly growing economy of Mongolia.

 

These guy's have a good idea, but I've never understood what their plan is.  All I know is that they are trying to capitalize on Mongolia's growth...the rest has been a bit haphazard. 

 

I suspect the losses from the insurance business are obscuring the results from the real estate business.  Insurance is not easy from both a statistical and marketing perspective, and probably even more difficult in a region where no one has really ever bought it before and has no historical record of insurance losses. 

 

Lastly, if China slows...what happens to that real estate portfolio if prices fall drastically?  Smart guys, so I'm sure they have already thought these things through. 

 

From a management point of view, I would also suggest that Kuppy write just quarterly or semi-annually.  Too much information for investors and shareholders, so it looks like they are constantly changing strategies in a very short period of time.  Run the company, make money, build equity and then worry about providing updates. 

 

I have to give them all the praise in the world for their compensation structure though.  Kuppy and Jordan get paid nothing, and director's fees, etc are all well under their peers.  Good luck to them in the new frontier!  Cheers!     

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Hey all:

 

I've been following this one for a while and have been intrigued.  I've never pulled the trigger, as I am waiting for them to post up some net earnings and to see how the situation in China plays out.

 

I've also resisted pulling the trigger, as I was never comfortable with the valuation levels.

 

The prices seems to have come down to a more reasonable level, but they are probably going to book a loss after selling the insurance sub.  Probably the right move if it were losing money & taking up time.

 

I think Mongolia will probably do well, especially if the mines are the quality is good.  It is probably going to be easier for China to get resources from Mongolia than Brazil or Australia.

 

I'll be watching this one...If they can start showing some real progress, the share price comes down, and the economic situation levels out, this could be a good buy.

 

 

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A few months ago, I attended an MGG presentation in NY by Kupperman.

 

Here are links to the powerpoint and transcript:

http://mongoliagrowthgroup.com/wordpress/wp-content/uploads/2013/06/New-York-final-formatted-Final.pdf

 

http://mongoliagrowthgroup.com/wordpress/wp-content/uploads/2013/06/Mongolia-Growth-Group-Presentation-Transcript.pdf

 

During the Q&A, he estimated current NAV in the mid-2s CDN, compared to a BVPS of 1.41 CDN and most recent market price of 3.28 CDN.  Unfortunately, he didn’t include a transcript of the Q&A session.

 

MGG’s current thesis seems to have honed in on two ways to play Mongolia: 1) acquisition of prime retail locations and 2) re-development.

 

The first part seems to be a play on increased per capita disposable income.  The second part seems to mean the assembly of large land parcels in UB's growing business district.  Then, partners with expertise in design and construction (and a desire to invest the capital necessary to complete construction in exchange for partial ownership).  Once complete, MGG will manage and lease out the buildings.

 

In the meantime, the Mandal Insurance asset and residential holdings will be sold off (as noted by Parsad).  It’ll be interesting to see how the removal of the insurance unit impacts operating results as well as the difference in the cost and sales prices for the residential portfolio.

 

Never spoke to him but seemed like a good guy.  Management and the BoD own 1/3 of shares outstanding which is a plus.  I find it to be an extremely interesting idea that one could hold for the long-term (5-10 years), albeit in small size.

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A few months ago, I attended an MGG presentation in NY by Kupperman.

 

Here are links to the powerpoint and transcript:

http://mongoliagrowthgroup.com/wordpress/wp-content/uploads/2013/06/New-York-final-formatted-Final.pdf

 

http://mongoliagrowthgroup.com/wordpress/wp-content/uploads/2013/06/Mongolia-Growth-Group-Presentation-Transcript.pdf

 

During the Q&A, he estimated current NAV in the mid-2s CDN, compared to a BVPS of 1.41 CDN and most recent market price of 3.28 CDN.  Unfortunately, he didn’t include a transcript of the Q&A session.

 

MGG’s current thesis seems to have honed in on two ways to play Mongolia: 1) acquisition of prime retail locations and 2) re-development.

 

The first part seems to be a play on increased per capita disposable income.  The second part seems to mean the assembly of large land parcels in UB's growing business district.  Then, partners with expertise in design and construction (and a desire to invest the capital necessary to complete construction in exchange for partial ownership).  Once complete, MGG will manage and lease out the buildings.

 

In the meantime, the Mandal Insurance asset and residential holdings will be sold off (as noted by Parsad).  It’ll be interesting to see how the removal of the insurance unit impacts operating results as well as the difference in the cost and sales prices for the residential portfolio.

 

Never spoke to him but seemed like a good guy.  Management and the BoD own 1/3 of shares outstanding which is a plus.  I find it to be an extremely interesting idea that one could hold for the long-term (5-10 years), albeit in small size.

 

Thanks G2!  I don't know Kuppy, but I've known Jordan for about 8 years...he is a good guy.  Lots of potential in what they are doing, but a fair amount of risk, as Mongolia goes the way China goes.  If China continues to thrive for the next 20 years, Mongolia will pan out like they expect.  Although, I suspect we may see a short-term hiccup on the way to China's rise. 

 

I have not had any faith in China's finances for years, and I'm not about to start now.  I think everything was built on easy credit, and the bubble is enormous.  They are rich enough to float the bubble for a while, but at some point the easy credit will stop and so will the music.  You are seeing pains on the developer side.  That's where the bubble bursting impacts first.  Then you start to see liquidity dry up as the easy credit slows, while debt ratios remain high.  Finally, the off-balance sheet liabilities start to appear...who owes who money, and exactly how levered were they.  Then it hits the corporations, and finally the consumer. 

 

We are still early...liquidity is drying up, credit is tightening, while the government tries to loosen the purse strings to create a soft landing.  Hard to create a soft landing when you were flying at 20,000 feet and the plane is dropping like a rock.  We'll see what happens, but I suspect the U.S. is going to have to keep the global economy alive as others falter...and exactly how that happens when the tap turns off is beyond me!  Cheers!

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good points on vertical advantages no free lunch & china parsad. 

 

china will work out its issue within ten years in my opinion.  in my opinion, this is more of a buy on extreme pullback play and only if one has an extremely longterm horizon. 

 

management is indeed excellent.  i've also spoken with jordan and they are looking at the downside in microscopic detail and trying to avert it.

 

 

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Thanks for sharing insights into China, Parsad!

 

I imagine there will definitely be some volatility in the name and perhaps an opportunity to buy below NAV or even book value will emerge in the future.

 

Ultimately, I imagine YAK's thesis will play out.  I am comfortable buying into the premise of a structural cost advantage existing for natural resources like copper and coal to be exported to China vs Australia or South America and that process will in turn fuel Mongolia's economic growth.

 

Meanwhile, I'm not too confident on the timeframe or how it will all develop given the prospects of a hard landing in China as you mention.  Do you have any data sources or analysis that you'd recommend on China's consumption and inventory of natural resources through various future economic scenarios?

 

Part of my thought process related to continued growth in Mongolia is guided by Rio Tinto's continued investment in the Oyu Tolgoi mine as a recent Bloomberg article noted a potential further $5.1b investment which will presumably flow through Mongolia's economy ((http://www.bloomberg.com/news/2013-07-24/oyu-tolgoi-ceo-said-to-step-down-in-november-after-term-ends.html)).  I think that is equivalent to about 50% or a bit more of their current GDP.

 

My thinking is that Rio Tinto and other miners are much more exposed to a China hard landing but will not shut-down their mine development programs in the short-run as that would be un-economical (as I think that for similar, large projects the argument of sunk costs does not apply because stopping development with the intention to start again would be more costly).

 

YAK is positioned more so to benefit at the first level from the miners' continued investment in the properties given the substantial up-front fixed costs to get a mine to be operational and then at the second level of Mongolia's increased due to exports of these natural resources.  Greater upside presumably exists at the second level for both the miners and Mongolia and in turn YAK.

 

Kupperman's presentation provided an estimate of GDP growth of $5b to $50b between 2010-20 which is really difficult for me to wrap my head and I don't know if I necessarily buy into those estimates.

 

Mentally, I've decided to view YAK as a long-term call option with a binary outcome.  Perhaps others will view that as an irrational approach.  Strictly prefer a positive outcome but am also comfortable with a zero.  Hopefully, their required rate of return for their projects substantially exceeds what one could earn when sticking cash in a local Mongolian bank with interest rates of 10-15% p.a.

 

The current YAK strategy suggests that ongoing operations will be funded by rent collected from the prime retail properties while the construction of high-rise commercial buildings will take longer to come to fruition.  More value will presumably be created in re-development so I agree it is a reasonable strategy to patiently watch the ticker price while also watching for tangible developments on that side of the business and the evolving economic situation in China.

 

Perhaps as I think this through it would make more sense to watch for YAK's re-development plans come to fruition and buy on price dips that may occur in connection with negative news on a China hard/soft landing if the long-term thesis remains intact on mineral/natural resource export to China.

 

Kupperman and Jordan seem to make a good team and complement each other--it's an intuitive observation but from the limited time I saw them interact Kupperman seems much more focused on the big picture and has a big personality to match, while Jordan seems more introverted and focused on the micro and operational aspects of the business.  Of course, I imagine he'd be different outside of a shareholder meeting but that was my initial read from seeing them in person for the first time.

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Part of my thought process related to continued growth in Mongolia is guided by Rio Tinto's continued investment in the Oyu Tolgoi mine as a recent Bloomberg article noted a potential further $5.1b investment which will presumably flow through Mongolia's economy ((http://www.bloomberg.com/news/2013-07-24/oyu-tolgoi-ceo-said-to-step-down-in-november-after-term-ends.html)).  I think that is equivalent to about 50% or a bit more of their current GDP.

 

http://www.theglobeandmail.com/globe-investor/resource-rich-mongolia-an-outpost-of-the-wild-wild-east/article13531356/

 

Kupperman's presentation provided an estimate of GDP growth of $5b to $50b between 2010-20 which is really difficult for me to wrap my head and I don't know if I necessarily buy into those estimates.

 

Would like to see those estimates and how they were calculated...the range is enormous!

 

Hopefully, their required rate of return for their projects substantially exceeds what one could earn when sticking cash in a local Mongolian bank with interest rates of 10-15% p.a.

 

I'm just wondering how those banks afford to pay those rates.  Rates rise but currency depreciates.  Hmmm.

 

The current YAK strategy suggests that ongoing operations will be funded by rent collected from the prime retail properties while the construction of high-rise commercial buildings will take longer to come to fruition.  More value will presumably be created in re-development so I agree it is a reasonable strategy to patiently watch the ticker price while also watching for tangible developments on that side of the business and the evolving economic situation in China.

 

That real estate will be worth a lot more in the long-term...maybe 15-20 years from now.  I'm in the camp that in the short-term, it's going to be worth ALOT less.  Be careful!  China has popped...but can they keep pumping air in to keep the balloon afloat?  Cheers!

 

 

 

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