Mongolian Growth Group

[twacowfca]

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!

 

Paradoxically, it's more difficult to make decent, lasting returns in stocks in rapidly growing economies than in developed economies because profits have to be reinvested to ride the tiger until there is a shake out in a developing industry with only a handful of profitable companies left standing.  Think steel, airlines, auto and aircraft manufacturers in 20th century USA.

[Guest ajc]

October 2013 - Monthly Letter To Shareholders

 

"To the Shareholders of Mongolia Growth Group Ltd.,

 

Please note that as part of our effort to provide maximum transparency to investors, we will begin providing monthly data on same store rental growth along with property occupancy data.

 

In October 2013, MGG’s core commercial property portfolio* experienced a same-store rental increase of 21.4% relative to October 2012 on properties owned 12 months or longer as measured in local currency (Mongolian Togrog).  The occupancy rate for the core portfolio in October 2013 was 93.9%, including an occupancy rate of 98.7% for core retail properties and an occupancy rate of 84.9% for core office properties..."

 

http://mongoliagrowthgroup.com/?p=2322

[Parsad]

Is the business profitable yet?  Even if you look at only the rental business, minus operating expenses unrelated to insurance, stock option compensation, etc...the enterprise is still not making money.  Cheers!

[twacowfca]

Is the business profitable yet?  Even if you look at only the rental business, minus operating expenses unrelated to insurance, stock option compensation, etc...the enterprise is still not making money.  Cheers!

 

And the annual average temperature there is well below zero centigrade, about the same as atop Mount Washington, Maine, the windiest place in the world, and one of the coldest.  Does the tenant pay the utilities?

 

This could be a good investment if they bought property near a bottom. Did they?  But there may be agency risk, political risk etc.

[rkbabang]

Is the business profitable yet?  Even if you look at only the rental business, minus operating expenses unrelated to insurance, stock option compensation, etc...the enterprise is still not making money.  Cheers!

 

And the annual average temperature there is well below zero centigrade, about the same as atop Mount Washington, Maine, the windiest place in the world, and one of the coldest.  Does the tenant pay the utilities?

 

This could be a good investment if they bought property near a bottom. Did they?  But there may be agency risk, political risk etc.

 

Mt Washington is in New Hampshire.

[valuesource]

Is the business profitable yet?  Even if you look at only the rental business, minus operating expenses unrelated to insurance, stock option compensation, etc...the enterprise is still not making money.  Cheers!

 

And the annual average temperature there is well below zero centigrade, about the same as atop Mount Washington, Maine, the windiest place in the world, and one of the coldest.  Does the tenant pay the utilities?

 

This could be a good investment if they bought property near a bottom. Did they?  But there may be agency risk, political risk etc.

 

Jordan and Harris are friends of mine as well and I did participate in the first 3 financings.  Most of the properties in Ulaanbaatar are steam-heated.  I recall the city trying to expand the central grid by constructing two new thermal plants.  Until such time as the new power came onstream Harris thought some of the existing heating permits would have to be recalled and no new permits issued.  He saw this restricting the supply of competing properties. 

 

[Parsad]

Valuesource,

 

With insurance going out the window, what is the main strategy for YAK?  Ownership of rental and commercial properties? 

 

Do you see operating costs decreasing over time as rental income increases...is that sort of the expectation?  Thanks and cheers!

 

[twacowfca]

Is the business profitable yet?  Even if you look at only the rental business, minus operating expenses unrelated to insurance, stock option compensation, etc...the enterprise is still not making money.  Cheers!

 

And the annual average temperature there is well below zero centigrade, about the same as atop Mount Washington, Maine, the windiest place in the world, and one of the coldest.  Does the tenant pay the utilities?

 

This could be a good investment if they bought property near a bottom. Did they?  But there may be agency risk, political risk etc.

 

Mt Washington is in New Hampshire.

 

 

Oops! My bad. Got confused with Mt. Katahdin Maine, the end of the Appalachian Trail. I'm not a through hiker, but a fan of someone who was.

[valuesource]

Sanj,

I think the insurance business sounded good from the perspective that there was no competition.  If they got paid for float it would have been great (in theory).  Most of the big business was in insuring large machinery (mining) but it was being written outside Mongolia.  They pulled the chute early and the general sentiment was, "focus on the original strategy".  You guys have it pinned pretty much.  Big GDP Growth = Higher Income = Lifestyle Aspirations.  They own primarily commercial properties in prime locations.  In most cases, they are prepared to make reasonable leasehold improvements when it converts to immediately higher rents.  I may go to visit them next year (not till the summer!)

[Eric50]

Harris Kupperman interview:

 

http://classicvalueinvestors.com/i/2013/12/interview-with-harris-kupperman-ceo-of-mongolian-growth-group-2/

[matts]

MGG is doing some roadshows in April if anyone is interested.

 

http://web.tmxmoney.com/article.php?newsid=66450010&qm_symbol=YAK

 

New York City

 

Monday March 31st at 5:30 PM at the TKP New York Conference Center in the East Village Room, 109 West 39th Street, New York City

 

For more information on TKP New York Conference Center, visit http://www.tkpny.com/ 

 

 

Los Angeles

 

Monday April 7th at 5:30 PM at the Sheraton Los Angeles Downtown in the California Room, 711 South Hope Street, Los Angeles

 

For more information on the Sheraton Los Angeles Downtown Hotel, visit

http://www.sheratonlosangelesdowntown.com/ 

 

 

Chicago

 

Thursday April 10th at 5:30 PM at the Crowne Plaza Magnificent Mile Hotel, 160 East Huron Street, Chicago

 

For more information on the Crowne Plaza Magnificent Mile Hotel, visit http://www.avenuehotelchicago.com

 

 

Toronto

 

Tuesday April 15th at 5:30 PM at the King Edward Hotel, 37 King Street East, Toronto

 

For more information on the King Edward Hotel, visit http://www.omnihotels.com/toronto

 

 

If you wish to attend one of the presentations, please email Christy LeCuyer at christy@mongoliagrowthgroup.com and note which presentation you will be attending.

 

[alertmeipp]

I saw the insiders have been selling this heavily,  any reason why?

[orion]

Anyone still following this one? Seems they are now trading below book value for the first time.

[ItsAValueTrap]

They have real estate with ~95% occupancy yet they seem to have negative cash flow.  Ridiculous.  How do you get negative yield on a low-risk asset?

 

Their overhead is horrendously bloated.

[Morgan]

I really hope that I have made a mistake in my quick overview of the financials (Condensed Interim Consolidated Financial Statements For the three and six months ended June 30, 2014 and 2013. They have $45m worth of property, but are on track to pull in only ~2m in revenue from the properties?

 

Based on that alone, it seems like they have way, way overpaid for the real estate. Please tell me if I'm wrong. I'd like to know what I'm missing.

 

 

Also, the "Unrealized gain on fair value adjustment on investment properties" in the Statements of Operation for about $7.9m really alters their net income (but not cash flow) to make them profitable. They readjusted the value as described in Note 7:

"During the six month period June 30, 2014, management applied its judgment to calculate the fair value of investment properties using the income approach and the sales comparable approach, which are generally accepted appraisal methodologies."

 

How many times can they readjust this upwards?

 

[anders]

Morgan,

 

We have followed YAK for a nr of years and continiously building on our position and we are not worried. We see this as a long term.

 

Mongolia is a high interest country, basically no leverage in the system and all reports coming in points to a bright economic future.

 

The best leverage on good country prospect is as you know, infrastructure, financial institutions, real estate.

 

We have great faith in Harris and believe this company will cover the real estate part to bring prosperity many years to come.

 

The bottom nrs will come when they decide to slow down growth,

 

Rgds

 

 

[gg]

I've loosely followed them over the years, but never too closely. Anyone know why they're shares have tanked lately? Is it a Mongolia issue, company-specific, something else?

[premfan]

I really hope that I have made a mistake in my quick overview of the financials (Condensed Interim Consolidated Financial Statements For the three and six months ended June 30, 2014 and 2013. They have $45m worth of property, but are on track to pull in only ~2m in revenue from the properties?

 

Based on that alone, it seems like they have way, way overpaid for the real estate. Please tell me if I'm wrong. I'd like to know what I'm missing.

 

 

Also, the "Unrealized gain on fair value adjustment on investment properties" in the Statements of Operation for about $7.9m really alters their net income (but not cash flow) to make them profitable. They readjusted the value as described in Note 7:

"During the six month period June 30, 2014, management applied its judgment to calculate the fair value of investment properties using the income approach and the sales comparable approach, which are generally accepted appraisal methodologies."

 

How many times can they readjust this upwards?

 

 

2million revenue for 45 million cost of property is horrendous.  I enjoy kuppy's blog and I tend to agree with his thinking quite often.  I think he structured the company in the  wrong way. Owning and managing assets requires being close to the area.  Outsourcing the management of  an asset from the startup phase is not efficient. He is going for price appreciation to flip rather than maximizing earnings.  Wow if I had 45 million to spend on property in the U.S. we can do multiplies of 2 million revenue. 

 

He doesn't run a cost efficient operation all those expensive flights to Mongolia from Miami to check on the assets. Redeveloping assets is very smart and lucrative if done the efficient way. After redevelopment done add more value to redeveloped asset.  Seed a business and give operator 25 percent equity and "x" of profits to operate business he has a track record in.  After 3 years or so he or she can have the option to buy you out. Then they can sign a long term lease. Another idea is to redevelop a garbage hotel  to a economy brand.  Don't redevelop an asset without a plan to further add value either via seeding operator or branding property or change of use. Change of use from commercial to residential in a downtown location could be very lucrative.

 

 

[ItsAValueTrap]

2million revenue for 45 million cost of property is horrendous.

 

2million pre-tax profit on 45 million is a 4.4% yield.

Interest rates in Mongolia are apparently 12%.

 

:o

[Morgan]

2million revenue for 45 million cost of property is horrendous.

 

2million pre-tax profit on 45 million is a 4.4% yield.

Interest rates in Mongolia are apparently 12%.

 

:o

 

It's not $2m pre-tax profit. For 2014 they're on track to have about $2.3m in revenue with about $6.6m in expenses and they have no mortgages on the properties.

[ItsAValueTrap]

My bad.  They have negative yields.  What geniuses.

[Morgan]

My bad.  They have negative yields.  What geniuses.

 

No problem :)

 

By the way, where did you see the 95% occupancy statistic? Was it in one of their recent monthly letters? I didn't come across it, but I wasn't looking for it.

 

Cheers!

[ItsAValueTrap]

Read their latest shareholder letters.

 

http://mongoliagrowthgroup.com/investors/monthly-shareholder-letters/

[Parsad]

My bad.  They have negative yields.  What geniuses.

 

No problem :)

 

By the way, where did you see the 95% occupancy statistic? Was it in one of their recent monthly letters? I didn't come across it, but I wasn't looking for it.

 

Cheers!

 

95% occupancy means nothing when the rent doesn't cover expenses.  I can get you 95% occupancy in any city if I price the rent significantly less than operating costs. 

 

They were buying property all through the commodity bubble...bubble burst!  Unless commodity prices rise again in the next few years, I cannot see how their real estate value won't come down.  Stock is reflecting that sentiment.

 

Cheers!

[Morgan]

My bad.  They have negative yields.  What geniuses.

 

No problem :)

 

By the way, where did you see the 95% occupancy statistic? Was it in one of their recent monthly letters? I didn't come across it, but I wasn't looking for it.

 

Cheers!

 

95% occupancy means nothing when the rent doesn't cover expenses.  I can get you 95% occupancy in any city if I price the rent significantly less than operating costs. 

 

They were buying property all through the commodity bubble...bubble burst!  Unless commodity prices rise again in the next few years, I cannot see how their real estate value won't come down.  Stock is reflecting that sentiment.

 

Cheers!

 

There's no question there. It'd be better if they had 20% occupancy with $2m in revenue then at least if expenses stayed in a similar range and revenues went up 4-5x they'd make money. But 95% occupancy means there's not much more room for revenue growth.

 

Just curious Parsad, what do you think the long term play for the management is? They clearly can't run the company like this for too long. They'll run out of cash. So as Anders seemed to imply (Anders, please correct me if I'm mistaken), the end goal seems to be appreciation and not cash flow?