Christensen Capital, LLC
Mongolia Growth Group Ltd. (
) operates as a real estate investment and development company. The
company is engaged in the ownership of retail, office, and
redevelopment investment properties; management of investment
properties; and construction, development, and repair of investment
properties primarily in the Downtown and the Central Business
District of Ulan Bator, Mongolia.
Note: The stock symbol in MNGGF. The company, in its documents,
uses the abbreviation MGG to refer to itself. The rest of the
article uses MGG instead of the stock symbol.
Why Mongolia? Why now? This is one of very few countries left on
earth that has the ability to launch themselves rapidly into the
21st century. Before a country can progress, it needs certain
ingredients: an entrepreneurial culture, political stability, an
element of democracy, economic stability, property ownership laws,
and law and order. In addition, there has to be an untapped
resource (either labor or natural resources) that will draw in
capital and elevate the standard of living. Mongolia has met these
As a second source of evidence as to why Mongolia has met these
conditions I point to the KFC indicator. If YUM! Brands (
) is opening new restaurants in a country, then the basic
ingredients exist for capitalism and investment. YUM! Brands,
owners of KFC, know a little something about opening restaurants in
foreign lands. KFC now has 4,600 KFC restaurants in China and is
the number one brand there. In addition to India and many other
countries, KFCs is now opening in several African countries. KFC
entered Mongolia in 2013 and plans to open 15 restaurants in the
next few years. It took KFC only 18 months from conception to
opening the first KFC there. Mongolia is open for business.
Why Mongolia Growth Group ((MGG))? Harris Kupperman (currently
the chairman) founded MGG and brought the company public in 2011.
Harris, who was a hedge fund manager at the time, has now learned
the ropes in Mongolia. MGG has retail space, commercial space and
land in the capital, Ulan Bator. MGG has gained all the skill-sets
to grow with this expanding economy. In addition, the total value
of all real estate is not big enough to move the needle of a large
real estate company. MGG is the perfect size to benefit and attract
little or no competition from the big outfits.
Over the last several years, Harris has acquired real estate
assets under the single umbrella of MGG in different stages of
development and a talented real estate team for acquisition,
leasing and property management (collectively the business
structure). He has hired Mongolians with western education and
experience. Harris wants to maximize the value of structure. Early
this year he made contact with Paul Byrne and hired him as an
advisor to MGG. Harris liked Paul's ideas for optimizing the
structure and hired Paul as CEO. Paul's experience included:
California real estate, development around the Hong Kong
International airport, New York Port Authority and work on
redevelopment of the World Trade Center area following 9/11, and
CEO of a $6 billion dollar real estate firm in Dubai. Paul was
looking for a new challenge in a dynamic economy and found that in
The catalyst for owning MGG (besides owning real estate in the
fastest growing country in the world) is this: MGG is now aligning
its structure to match investors' demand. For example, if an
investor wanted to invest in a REIT in Mongolia, MGG in its current
form has too many moving parts for that type of investor. MGG is in
the process of developing an in-house REIT. MGG will populate this
REIT from the portion of its real estate holdings that have been
stabilized. MGG will also form a private equity firm for those
interested in development. The plan is to develop property, then
sell it to the REIT. MGG would then retain a percentage of interest
and get paid a fee for management of the REIT. In my opinion, MGG's
structure would also support a joint venture with a large investor
that wanted to establish investments in this dynamic economy.
To start a reader on their due diligence path, I want to touch
on list of interesting conditions in Mongolia. 1990 was a watershed
year for Mongolia. That was the year they broke free from Soviet
rule and towards a true democracy. The next watershed year was 2009
as the Government of Mongolia repealed the windfall profits tax and
struck a deal with Rio Tinto to open one of the largest copper
mines on earth, i.e. Oyu Tolgoi or Turquoise Hill. Mongolia has a
robust two-party system with a fair amount of freedom of press.
Politicians have gone to jail for corruption. Car insurance wasn't
required by law until recently. The President of Mongolia's hero is
Ronald Reagan (Reagan's speech calling the Soviet Union an evil
empire helped inspire democracy in Mongolia). Ulan Bator is more
like a city state in a country that is over 2x the size of Texas.
The Texas economy is over 100x larger. About half of the
populations of Mongolia (2.8 million people) live in the capital,
Ulan Bator. Sixty per cent of that population still live in gers,
i.e. the animal skin round tents. Heat for the downtown buildings
is piped in from waste heat from an electrical power plant. The
society is quite homogeneous. The national pastimes are horseback
riding, archery and wrestling. There are plenty of clips about
Mongolia and the copper mine Oyu Tolgoi on YouTube. CharlieRose.com
did a very interesting interview with the then Prime Minister on
9/28/2010. This interview was started me on a path to an investment
An investor shouldn't get too worked up during election time.
The political rhetoric is not that much different than here in the
US. Wasn't it during our last Presidential election cycle that we
were going to punish China? Politicians say populist things, but
underneath nearly all Mongolian politicians have an interest in the
mining industry. You can bet in the end, regardless of the
political winds, these resources are coming out of the ground over
the coming years.
There are massive infrastructure projects (roads, rail, power
plants, coal gasification) planned or in progress in the country to
get these resources to market.
It is very difficult to get up-to-date information in English on
infrastructure projects from official government websites. The last
document available that I could find from the Mongolian Ministry of
Roads, Transportation, Construction and Urban Development listed
infrastructure projects for the years 2010-2016 at $35 billion USD.
There have been numerous other projects announced since then. MGG
puts the estimate at $56 billion for infrastructure and major
industrial projects. Note: $56 billion is over 5x the current size
of the economy!
Currently, the book value of MGG is $1.20 per share (audited
financials 12/31/2013, $0.92 USD to Can $). As of this writing, the
stock is selling just under at 2x stated book ($2.21 per share).
The $1.20 understates both the liquidation value and the long term
intrinsic value of the company. For one, it would take several
years to replace the team of professionals and experience that MGG
has in the local real estate market. In addition, there is value in
the relationships that the company has established with banks and
other real estate professionals in the capital. In my opinion, the
stated book value of their real estate is undervalued due to the
difficulty finding like properties for the appraisers to use, thus,
the value of the land is stated at original cost. Their financials
show the value of their land holding or re-development property
dropping 23% in 2013. I suspect the value actually rose a double
digit amount. This is based on a third party source who estimated
land values went up 30% in 2013. Source:
. Here is their projection for 2013 and historical value of Ulan
Bator land prices.
Here is a list of catalysts for investing in this company:
- MGG is realigning the business structure to better fit
- The hiring of a seasoned CEO with international experience in
- MGG is the only liquid and fully audited independent
investment available in Mongolia. I don't consider TRQ an
independent company, RIO owns 51%
- This is the fastest growing economy in the world
- The Chairman and CEO's compensation, in large part , based on
- Current per capita income is at $5,500 in Mongolia. This is
likely to grow double digit for the next decade.
- In Mongolia bank loans cost 12-15%, if you can get them. I
believe that MGG, with their public structure, can find outside
sources of capital that their competitors can't. If MGG can find
a cheaper source of capital, their competitive advantage will
- MGG's holds real estate in the core of downtown Ulan Bator.
Space is limited due to only one main through street east and
west, and to the north and south bounded by mountains. Real
estate will continue to sell at a premium in the core
I should also mention that the value of the Mongolian Currency
has been weak of late. In my opinion, over the longer term this
won't be a problem to a long-term investor.
I can't think of another company that is this transparent. MGG
puts out a monthly newsletter discussing recent developments at:
. I believe the stock should sell at a premium to book value. In
2011, the stock sold for 4x book value. Currently, it sells for 2x
understated book value and in my opinion the value of the company
has gone up and the future strategy of the company is clearer.
I have met both Harris Kupperman and Paul Byrne. They are
long-term sharp investors and are doing the right things to create
value over the next 3-5 years.
I am long MNGGF. I wrote this article myself, and it expresses my
own opinions. I am not receiving compensation for it. I have no
business relationship with any company whose stock is mentioned in
I own MNGGF for the hedge fund I manage. I have been accumulating
this stock. I have no current plans to trade the stock.
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