Mongolian Growth Group: A Pick And Shovel But Not For Commodities
By Free Cash Flow 50 :
One thing I have experienced with investing is that occasionally you come across a company that has the unique ability to make you feel as if you personally know the managers running the business such as Berkshire Hathaway (BRK.A)(BRK.B), Leucadia ( LUK ), etc. This stems chiefly from a level of communication that is straightforward and simple as opposed to abstract and esoteric. Absent is the usual corporate gibberish that permeates corporations the world over when discussing their business. I don't know if there are any statistics on this but it seems that when a company has a high level of transparency it is usually coupled with managers that have a large personal equity stake in the company as opposed to a hired gun with a high salary and tons of options that were given to them.
One interesting little company fits this mold and represents two things that are seemingly rare in developing countries: Incredibly transparent operations and large shareholder owners. These are the types of companies that you dream about as one of the biggest and arguably toughest aspects to gauge (that of management quality) is not only not an area of concern, but perhaps its greatest strength. It doesn't take long to develop an immediate comfort with the company. I experienced this simply by reading a single shareholder letter (which are written each month.) The above paragraph describes the situation that can be found with Mongolia Growth Group (MNGGF.PK) . It has been previously written about here for some good background.
If you've ever tried looking for investments in Mongolia, then you know it is a bit of a fruitless exercise (save for some large miners that have operations in the country). It was this lack of suitable investment opportunities that led hedge fund manager and current CEO Harris Kupperman to move to Mongolia and set up the business. The intent was to create the type of company he had hoped to find when initially looking for investments there. Summus Capital was the original name before being taken over by Kupperman and being renamed Mongolia Growth Group in February of this year.
The simple but incredibly powerful old recipe of: High insider ownership+Good economics = Great results.
The statistics about companies which have large insider holdings and how they tend to crush the market over extended periods of time is not exactly a secret but this approach perhaps doesn't get the recognition that it most assuredly deserves. Of course of equal importance is the price paid in buying stock in a situation like this but it remains an incredibly powerful factor to look at. What is even better is when you get the founders of the company running the show and at the same time are the largest shareholders.
As it stands today, insiders own just under 38% of Mongolia Growth Group after their most recent share offering with the CEO holding a bit over 17%. Even more comforting is the fact that the CEO Harris Kupperman and the COO Jordan Calonego take no salary, stock options, performance allocation, bonus or anything else.
This snippet alone from the first shareholder letter written in February describes the company in a nutshell:
We have no interest in building the biggest Mongolian company or anything else of that sort. Our decision to forgo compensation ensures that we gain no benefit from doing such a thing. Ego and prestige do not guide this venture. Rather, we prefer to focus on profits, returns on capital and increase in intrinsic value per share as measures of performance. If we can increase per share value, then we have done our job well.
Picks and shovels
There has certainly been a buzz around Mongolia the past few years given the immense natural resources the country possesses and its close proximity to China (for a quick primer, see this good article here ). This makes it potentially a miner's/oilman's dream. Perhaps a sensible way to try and capitalize on Mongolia's growth is just to take the basket approach and ride it out. In its young history however Mongolia Growth Group has decided to avoid focusing on the natural resources sector directly and place its emphasis instead on real estate, insurance, and financial services. The company is simply trying to find ways to gain leverage to the growth of the Mongolian economy.
Even though the company was recently formed, they have been quite busy on two fronts thus far: Insurance and real estate. They entered the insurance industry forming property and casualty insurance provider Mandel General Insurance and received their license in June. They are currently the best capitalized insurance company in the country.
With respect to real estate, the company has purchased 4,400 meters of rentable office and commercial space as well as over two dozen rentable apartments to date. The company noted that real estate prices in a downtown area of a capital city experiencing high growth also experiences large price appreciation. In the July newsletter to shareholders, CEO Kupperman gave this interesting snippet about real estate pricing in Kazakhstan and how a similar price appreciation is possible in Mongolia's capital of Ulaanbaatar:
Over time, the majority of the returns from a property portfolio are created by appreciation - especially in a rapidly growing economy. One only needs to look at Kazakhstan, to see what happens to property prices when an economy grows from a low base. We like to use Almaty, the largest city in Kazakhstan, as the template for our Mongolian investments as much of the architecture has a similar Soviet design. Currently, property prices in Almaty are five to twenty times the prices of comparable properties in Ulaanbaatar - hence the opportunity that we see as investors in Ulaanbaatar.
In the August shareholder letter it was mentioned that a few "sizeable" investments were made on the real estate front but nothing specific was noted.
In this type of situation (young company with limited operations) valuation is incredibly difficult and in my mind put in the "too hard" box. I would argue that in this scenario, the quality of management becomes that much more important. The bottom line : They have a significant invested interest in the long-term success of the business.
As in a lot of young companies, we can probably expect further share dilution but I don't believe it is necessarily something to count against them, especially since the CEO and COO purchased more shares in the two private placements that have taken place since they went public.
The stock has had a big run-up since going public in February, peaking at over $6 but since retreating to around $5 at the time of writing, from an IPO price of a bit over $1.00. Is it cheap? Fairly priced? Overvalued? I wish I could say with a bit more clarity but given how young the company is, these metrics are not really applicable.
Perhaps what is, is:
- Your holding period
- The quality of management
- The strategy the company is pursuing
For myself, I can say that my holding period is long-term, the quality of management is top notch, and I believe the strategy they are pursuing (picks and shovels) will bear much fruit in the future. That said, I hold shares but am hoping for a pullback in the price to purchase, as I think it has run up too far too fast, but believe it is one of the best ways to capitalize on the economic growth of Mongolia.
Mongolia Growth is a bet on the jockey perhaps more than the horse at this point, given the young age of the company, but I believe investors have a great one in Harris Kupperman. If you believe in the long-term that the Mongolian economy will continue to grow by leaps and bounds then the only question left in my mind is, Are these the types of partners that you want to team up with? I answer with a resolute yes. If there is a better way to invest in the future economic and financial prosperity of Mongolia, I have yet to hear of it.
Disclosure: I am long MNGGF.PK. I will be a further buyer of the stock if prices come down.
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