In the center of Ulaanbaatar, just a few hundred

yards away from an enormous statue of Genghis

Khan, sits one of Louis Vuittons most successful
stores in Asia.
The luxury retailer moved into the capital city of
Mongolia in 2009.
Sitting in an Italian restaurant overlooking a temple,
a foreign businessman who had been in Mongolias
capital for years told me the party to launch the store
cost a few million dollars.
It sold out of its entire inventory within the frst three
months of operation. Thats unheard of especially for
a city where, at the time, the average citizen earned as
much per year as someone in Sudan makes today.
The over-5,000-square-foot store sits at the entrance
of one of the citys most prominent skyscrapers.
Nestled among the citys skyscrapers are dozens of
small stores from pizza shops and coffee houses to
Irish pubs. There are also several fancy-looking malls
and boutique stores with prices at least as high as
youd fnd in New York.
Construction cranes are on just about every corner of
this small city. The streets are so clogged with cars
including plenty of BMWs and Range Rovers that
its often faster to walk than drive. I abandoned the
taxi that was driving me back to my hotel in favor of
walking several times.
Ulaanbaatar is a testament to the growing wealth of
Mongolia.
You see, the country is sitting on some of the worlds
richest earth. According to some estimates, the value
of Mongolias natural resource deposits could reach
$2 trillion the equivalent to the gross domestic
product (GDP) of Italy for a year.
Thanks to its natural resources, Mongolia is one
of the worlds fastest-growing economies. In 2011,
Mongolias economy grew by an incredible 17.5%.
And the International Monetary Fund (IMF)
forecasts that Mongolia will continue to be
one of worlds fastest-growing economies over
the next decade.
But just 10 minutes outside of Ulaanbaatar, people
live in small houses and gers (a felt tent typical in
Central Asia) without running water or paved roads.
Around a quarter of Mongolians live in poverty today.
Average GDP per capita (the value of the countrys
annual production divided by number of citizens) is
$3,700. By comparison, the U.S.s is $41,749.
But in time, the Mongolians living in poverty are
going to move up the socioeconomic ladder... and into
the 25,000 or so apartments that are built every year
in Ulaanbaatar.
Thats where this months opportunity lies in the
booming Ulaanbaatar real estate market.
Prevailing terrible sentiment toward Mongolia means
that investors arent giving the country a second
glance. Because of that, we can buy shares in a com-
pany well-positioned to capitalize on Mongolias
growth story for just a fraction of what the shares
The Market Is Ignoring One of the
Worlds Greatest Growth Stories
MAY 2014
How well set ourselves up to prot from one company taking advantage
will be selling for in a few years.
But before we get into this months recommendation,
lets take a deeper look at Mongolia.
From Booming Frontier
Market to Pariah
When you get outside Mongolias bustling capital of
Ulaanbaatar, you can understand why the countrys
nickname is Land of the Blue Sky. Wedged between
Russia and China and roughly the size of Alaska,
Mongolia is beautiful, endless, and open.
It has the second-lowest population density of any
country in the world. On average, there are just two
people per square kilometer. By comparison, theres
an average 34 people per square kilometer in the U.S.
If you take the total number of people who cram into
New Yorks Times Square for New Years Eve... and
multiply by three... thats how many people live in all
of Mongolia.
And underneath all that blue sky sits some of the
worlds richest earth. As I mentioned earlier, accord-
ing to some estimates, the value of Mongolias cop-
per, gold, coal, tin, uranium (the fuel used in nuclear
power stations), and tungsten (a rare metal used in a
variety of objects like light bulbs and x-rays) deposits
could reach $2 trillion.
Thats a lot of money And for a country with a GDP
of just $11 billion (as much as Gainesville, Florida), its
an inconceivably enormous fgure.
The growth potential of Mongolia as it begins to
chip away at that $2 trillion is huge. Over the past
10 years, Mongolias GDP has grown at an average
of 9% per year. And as I mentioned earlier, the IMF
forecasts that Mongolia will continue to be one of
the worlds fastest-growing economies over the next
decade.
Mongolias economic growth has been driven by its
mineral wealth for a number of years now. But the
real money didnt start moving in until October 2009,
when Canadian mineral exploration and development
company Ivanhoe Mines and the Mongolian gov-
ernment agreed on terms to operate the Oyu Tolgoi
copper mine.
With further development, its estimated the Oyu
Tolgoi mine will be one of the largest copper mines in
the world. Its capable of generating around 3% of the
worlds total annual copper production.
The deposit is so rich that it can produce around a
quarter of the total gold output of the entire country
of Indonesia, one of the largest gold-producing coun-
tries in the world, as a byproduct. Thats right, it can
produce that much gold simply as an afterthought of
copper production. This mine... its a freak of nature,
its so rich, a global mining expert told me.
Dozens of mining companies interpreting the deal
as a sign that Mongolia was a place where they could
do business rushed in. Many businesses that sup-
port mining companies like drilling, transportation,
and infrastructure businesses also opened shop in
Mongolia.
Soon after, investors poured into the countrys tiny
stock market. From late 2009 to its peak in early 2011,
the Mongolian Stock Exchange appreciated 433%.
Foreigners invested in high-yielding local bank ac-
counts that seemed to offer a one-way road to wealth.
With its astronomical wealth in the ground, Mongolia
was a sure bet.
Of course, theres no such thing as a sure bet.
Things fell apart in July 2012 when Mongolias govern-
MARKET INSIGHT Mongolia
Population
2.8 million about the population of Chicago
Capital
Ulaanbaatar
Size
604,000 square miles three times the size of Spain
Gross Domestic Product
$11 billion as big as Amarillo, Texas
Stock Market Capitalization
$750 million
Transparency Internationals Corruption Perception Index
Ranked No. 83 out of 177 countries on the same level
as Jamaica
World Economic Forums Global Competitiveness Index
Ranked No. 83 out of 148 countries on the same level
as Mexico
Ease of Doing Business
Ranked No. 76 out of 189 countries on the same level
as the Czech Republic
ment passed a law to limit foreign investment in com-
panies operating in strategic industries (like mining)
to a 49% stake.
In essence, the law gave the government veto power
over any signifcant investment in the countrys min-
ing sector. And investors fed soon after it was passed.
To understand why Mongolias government passed a
law so detrimental to investment in its economy, take
a look at where Mongolia is located:
As I said earlier, its wedged between Russia and China.
China accounts for more than 80% of Mongolias ex-
ports, mainly natural resources. The Oyu Tolgoi mine
is just 50 miles from the Chinese border.
But Mongolia and China have a complicated history.
Mongolia was a region of China less than 100 years ago.
Today, China has more than twice the number of soldiers
as Mongolia has people. And the possibility that some
of Chinas 1.4 billion people could get a bit of breathing
room under Mongolias blue sky while helping exploit
the countrys minerals keeps Mongolians up at night.
Just to the north looms Mongolias big brother, Russia.
During the Cold War, Mongolia was independent but
under the wing of the Soviet Union.
Many people over the age of 40 in Mongolia learned
Russian as children and still speak the language (al-
though with a heavy accent). The Mongolian alphabet
is the same as the Russian alphabet. Many parts of
Ulaanbaatar are a carbon copy of post-Soviet cities
in Central Asia like Bishkek and Almaty. For exam-
ple, dozens of apartment blocks built throughout the
Soviet Union (called Khrushchyovkas) can be found
throughout Ulaanbaatar.
So Russia has infuence over Mongolia. Russia is a
good balance to China, a local banker told me. Nei-
ther will let the other do anything in Mongolia.
But that balance was upset in April 2012 when Chinese
state-owned aluminum producer Chalco announced it
was going to buy a controlling stake in SouthGobi Re-
sources, a Mongolian coal company, from a Canadian
mining frm. The $900 million deal would have been
the biggest Chinese investment in Mongolia to date.
But the deal stirred up latent Mongolian concerns about
Chinese encroachment on its strategic assets. So in July
2012, a law to block the deal was passed but it also
blocked all other signifcant foreign investment, too.
Mongolias concern over the SouthGobi deal was rea-
sonable, as it would have been a big step toward China
controlling Mongolias coal industry. But the execution
to prevent it was terrible.
Trying the Local Cuisine
One of the things I like the most about traveling
is exploring the local cuisine. Some of my best
meals in recent months have involved kebabs and
rice in Tehran, Iran; beef in Harare, Zimbabwe;
and borscht in Kiev, Ukraine.
I wasn't sure what to expect in Mongolia. Coun-
tries under the former Soviet Union's infuence
favor bland palates. For example, for years,
ketchup and black pepper were at the far end of
the spicy spectrum in post-Soviet Russia before
the slow invasion of foreign culinary infuence.
And, unfortunately, Mongolia didn't disappoint...
While I was there, I ate a lot of bland lamb and
beef, dumplings, and noodle-like dishes.
When I was in Ulaanbaatar, I went to a Mongo-
lian barbeque place. You might have seen these in
the West. You pile raw meat, chopped vegetables,
and spices into a heaping bowl, and a guy wear-
ing a funny hat stir-fries it all on an enormous
fatiron griddle.
But Mongolian barbeque is about as Mongo-
lian as apple pie. The frst Mongolian barbeque
restaurant was opened in Taipei, the capital of
Taiwan, in 1976. As far as I can tell, labeling it
Mongolian was a marketing gimmick.
Maybe the most authentic thing about the place
was the cooked sheep head in the adjoining buffet,
nestled on a bed of potatoes and carrots. I like to
try the local cuisine... but in this case, I stuck with
the inauthentic.
I can understand where the government was coming
from, but they completely overstepped... They shot
themselves in the foot in the biggest way you can imag-
ine, one foreign businessman who has been in Ulaan-
baatar for more than a decade told me over lunch.
Things got worse a few months later when the govern-
ment pushed for Rio Tinto to re-negotiate the terms of
the Oyu Tolgoi mine deal.
In a matter of months, Mongolia went from a booming
frontier market to a pariah.
Mongolia has a heady brew of mammoth problems,
the Financial Times warned in 2012.
Mining companies that had so eagerly piled into Mon-
golia just months before scaled back their plans just
as quickly. Foreign investment, critical to Mongolias
growth, collapsed 54% in 2013.
The stock market collapsed and still hasnt recovered.
Its down 53% from its highs in early 2011. You can see
this in the chart of the Mongolian Stock Exchange Top
20 Index below. This index tracks the top 20 securities
in the Mongolian Stock Exchange.
Infation is running at more than 12% in the country.
And Mongolias currency, the togrog, has fallen 37%
against the U.S. dollar since June 2012.
Mongolias foreign reserves, which are used in part to
support the togrog, are half of what they were a year
ago. And Mongolias current account (which refects
the difference between imports and exports and is a
key measure that investors use to assess the health of
emerging economies) clocked in with a defcit of 27%
in 2013.
To make things worse, the slowdown in the Chinese
economy and a decline in global commodities prices
globally have hurt Mongolias trade position.
Despite the unintended consequences from the law,
Mongolias economy continued its fast-paced growth.
Some investors like to think that strong fundamen-
tals, cheap valuations, and earnings growth will raise
a markets valuations regardless of politics. But as
Mongolia shows, bad politics can ruin a market... for a
while, at least.
In 2013, a new government was elected in Mongolia. It
swiftly passed a new investment law that lifted virtu-
ally all of the foreign investment restrictions that had
been imposed. A number of other reform measures
were passed, showing that the government is a com-
plete break with the past. And the countrys president,
Tsakhiagiin Elbegdorj, has said that the Mongolian
government will not interfere with business at all.
But stock investors havent caught on to the fact that
things are falling back into place in Mongolia. And
thats exactly why were investing there this month.
Mongolia Fits My Criteria
for Contrarian Returns
When I look at a market, I use a set of criteria to see
if it fts the bill for potentially enormous contrari-
an returns (see the S&A Global Contrarian How-To
Guide for more details). I look at...
Sentiment: As Ive explained, despite being one
of the worlds fastest-growing economies, Mongolia
stumbled and sentiment turned toxic.
The Financial Times regularly refers to Mongolia as a
faltering economy. (Despite the fact that most wouldnt
view economic growth in the double digits as a problem.)
While I was visiting Ulaanbaatar a few weeks ago, Stan-
dard & Poors ratings agency downgraded Mongolias
sovereign credit rating (the credit rating of a national
government)... to even deeper in junk territory.
In Ulaanbaatar, I met a relocation-services specialist,
who helps families (mostly associated with multina-
tional frms) move their belongings to a new country.
Since the middle of last year, everyones been moving
out, he told me.
But Mongolias government is trying hard to put the
train back on the tracks.
In early May, the government kicked off a 50-point
plan to jumpstart the economy, with measures to sup-
port mining, manufacturing, and infrastructure.
Id far rather have these guys running my country
than the people we have now, one American investor
who has spent a lot of time in Mongolia told me.
And sentiment is slowing changing.
One way to gauge sentiment toward a country is to look
at its bond yields. Bond markets are generally much
larger and deeper (that is, there is more trading in
them) than stock markets. And bond markets are often
a leading indicator for equity markets. If bond prices
are going up, its a good bet stocks may soon follow.
For example, there has been a sharp rally in Mongo-
lias 2022 5.125% Eurobond (a type of international
bond). It suggests underlying confdence on the part of
bond investors... which is encouraging for Mongolias
stock market.
Valuation: The share prices of Mongolian companies
are a fraction of what they were just a few years ago.
As I mentioned, the countrys stock market is down
53% from its highs in 2011. If you factor in the depre-
ciation of the togrog (Mongolias stock market is de-
nominated in togrog), the Mongolian Stock Exchange
is down more like 75%.
Similarly, the share prices of many of the largest for-
eign-traded companies that have operations in Mon-
golia are also far below their highs, as you can see in
the following table.
So assets in Mongolia appear cheap right now.
But getting a handle on the valuation of the Mongolian
Stock Exchange is diffcult. You see, Mongolias ac-
counting practices result in lower earnings than youd
see in equivalent operations under Western account-
ing standards.
For example, in Mongolia, companies dont depreci-
ate capital expenditures (its posted as a current-year
expense). And foreign-exchange losses any company
with foreign-currency denominated loans in Mongo-
lia has them since the togrog has depreciated are a
direct hit to profts. In Western accounting standards,
they dont affect proftability in the same way.
So what does all this mean? At this stage in the
commodities cycle (that is, while the prices of many
commodities are weak), Mongolias stock market
isnt necessarily cheap... but its not expensive, ei-
ther. Remember, Mongolias market is tied to natural
resources. And with Mongolias strong catalysts (more
on those in a moment), theres enormous upside in
Mongolias market from here.
But unlike the last boom in Mongolian stocks, this
time the growth will be a gradual process. And theres
always the risk that shares could fall lower.
If the Chinese economy which is the primary buyer
of Mongolias natural resources slows down more
than expected, Mongolia will probably suffer more
than most other markets.
And if commodities prices continue to be weak (in
part because of a slowdown in China), Mongolia will
be hit hard. Finally, if theres a renewed exodus from
risk in the global markets (like there was earlier this
year when emerging markets fell sharply), Mongolia
will fall.
The good thing is that Mongolias economy is growing
fast. And Mongolian assets arent trading at all-time
highs Foreign investment, along with the togrog and
the stock market, has already collapsed. A cheap asset
can always get cheaper. But with the catalysts Im about
to tell you about, the way back up is clear for Mongolia.
COMPANY EXCHANGE
RECENT
HIGH
CURRENT
PRICE
CURRENT
MARKET CAP*
Turquoise Hill Resources NYSE $20.74 $3.83 $7.7 million
Mongolia Energy Corp. Hong Kong HK$18.06 HK$0.155 $135.1 million
Mongolian Mining Corp. Hong Kong HK$11.50 HK$0.61 $291.6 million
SouthGobi Resources Toronto C$20.39 C$0.62 $106.4 million
* In U.S. dollars
Catalysts: As I said earlier, Mongolia is open for
business again. But not many investors have noticed.
Foreign direct investment was down another 28% in
the frst two months of 2014. The currency has fallen
9% in 2014 so far. The Mongolian Stock Exchange is
down 14% in dollar terms in 2014, enough to make
it one of the worst-performing markets in the world
this year.
This will change... probably sometime soon. I see a
number of potential catalysts that will move Mongolia
back onto the radar.
Theres one catalyst that was at the top of the list of
most of the people I spoke with in Ulaanbaatar.
Rio Tinto, one of the worlds largest mining companies,
holds a 66% stake in the Oyu Tolgoi mine (through a
separately traded mining company, Turquoise Hill Re-
sources, which is 51% owned by Rio Tinto). So far, Rio
Tinto has invested more than $6 billion in the project
to access the mines natural resources.
But Rio Tinto has been locked in negotiations to
further develop the mine with the Mongolian govern-
ment. Rio Tinto wants to use phase two to turn Oyu
Tolgoi into the worlds largest copper mine that pro-
duces 3% of the worlds total annual copper.
But deadlines to initiate the fnancing for the $4.2 bil-
lion phase-two project have been missed repeatedly.
The Mongolian government is balking at Rio Tintos
efforts to increase the size of phase two, because this
will push back when Mongolia will begin to receive
dividends from the mine. The way the deal is struc-
tured is that Rio Tinto as the investor in the mine
recoups its investment before the Mongolian gov-
ernment (which isnt investing any cash into the mine)
makes a return.
But Rio Tinto might not really mind that the project
is delayed. Financing will be available regardless of
when the two sides come to a deal. There will always
be dozens of big banks and multilateral lenders lining
up to help one of the worlds biggest mining companies
develop what will be the worlds largest copper mine.
And Rio Tinto may want to eventually buy more
shares of Turquoise Hill Resources. Because phase
two hasnt started yet, shares of Turquoise are cheap.
So Rio Tinto may want to use the opportunity to get
more control on the cheap.
In some ways, its a bad situation, one long-time in-
vestor in Mongolia told me. Mongolia ends up looking
like its being diffcult. But really, its trying to make
sure that its not being taken advantage of by a big
global miner that has played this kind of game before.
Unlike Rio Tinto, Mongolia doesnt have the luxury of
time. Its a bit of a race now, an economist in Ulaan-
baatar said. Growth is still strong, but the macroeco-
nomic fundamentals are deteriorating. It's a question
of whether it will all come together in time.
The question is whether the deal will happen before the
further decline of the togrog and foreign investment.
Phase two matters so much that Mongolians 50-point
economic stimulus package specifcally instructs the
government to accelerate the development of the Oyu
Tolgoi project and to provide government policy
support to implement the project.
So the Mongolian government will fnalize the deal.
Its just a question of whether it happens within the
next few months... later in 2014 or in early 2015.
When the deal is fnalized, it will trigger the
start of a food of investment into Mongolia. It
will also signal that Mongolia is safe territory again
for investors. More mining companies will follow Rio
Tinto... and stock investors wont be far behind.
In the meantime, the Mongolian government has
strongly signaled that its going to stick to its word this
time and not interfere with business. Theres no guar-
antee that the Mongolian government wont change its
tune again and pass anti-investor legislation but its
clear that the government has learned its lesson.
Most importantly, members of parliament who play
a key role in developing policy got hit last time by
anti-investor regulations where it matters the most:
Their own wallets.
Id estimate that close to half of the members of
parliament have interests in the mining industry, a
banker in Ulaanbaatar told me. They felt the pullback
in investment almost immediately. And they dont
want it to happen again.
And the consequences of bad policy couldnt be clear-
er. The IMF has two separate forecasts for economic
growth in Mongolia a strong and a weak policy
scenario.
The scenarios are based on fscal and monetary pol-
icies, how the government pays its expenses, and the
impact these measures have on the countrys economy.
In the strong policy environment (which means Mon-
golias government is enacting fscally conservative
policies), GDP growth from 2014 to 2018 averages
7.3% per year. In the weak policy environment (which
means Mongolias government is enacting policies that
lead to excessive spending and fuel infation), GDP
growth averages just 2.5% per year.
Which way will Mongolia go?
If I was a member of Mongolias parliament and I
wanted to maximize the return of my mining invest-
ments, the choice would be clear to me. I think it will
be to them, too. So its likely Mongolias government
will keep its word and do everything it can to promote
investment in the country.
Another more market-specifc catalyst for Mongolia is
the countrys stock market becoming part of a frontier
index. A lot of fund managers make their investment
decisions based on the weighting of particular mar-
kets in an index.
In Ulaanbaatar, I had breakfast with a banker at one
of Mongolias largest brokerage houses. He told me
that Mongolia becoming a part of a frontier index will
be a big trigger for the stock market.
So once Mongolias stock exchange is added to a key
frontier index that a lot of investment funds follow
(like one of the indices produced by MSCI, one of
the largest index companies), there will be a sharp
increase in investment fow into the market. Thats
not going to happen any time soon, but it likely will at
some point.
Summing it all up, its just a matter of time before in-
vestors return to Mongolia. The country has enormous
potential and although its a small market, early
investors could earn huge returns.
If they get it right, Ulaanbaatar is going to be another
Doha or Kuwait City, one investor told me, referring
to the glistening capitals of two energy-rich Middle
Eastern countries. Thats what $2 trillion can do.
Finding the Right Recommendation
When I visit a market, sometimes I have a diffcult
time fnding the right investment opportunity. Even if
the market overall is attractive, shares of specifc com-
panies I like might be too expensive, or a stock might
not be liquid enough (that is, the shares dont trade
much), or I might not trust the management.
With Mongolia, I faced other challenges. A number of
traded stocks are more directly linked to big-picture
drivers like commodities prices than to the inter-
nal dynamics of whats going on in Mongolia.
Theres nothing wrong with that... but its not how
were looking to proft from Mongolias catalysts.
I want to recommend a stock thats more driven by
the growing wealth of Mongolians, rather than by
commodities prices (even though the two are closely
linked).
I found just that in this months recommendation
Enormous Growth Potential
in Mongolian Real Estate
Mongolia Growth Group (OTCMKTS: MNGGF)
owns and manages real estate in downtown Ulaan-
baatar including around 8% of total street-level
retail real estate on Peace Avenue, Ulaanbaatars main
high street. (A countrys high street is its main
shopping and business zone.)
One of its other main focuses is redevelopment proj-
ects... where it buys buildings and either knocks them
down and starts over, or else renovates them beyond
recognition, and then rents the properties.
Many of these sites are on prime real estate on Peace
Avenue. And theres a lot of redevelopment work to
be done.
When you look at all the old Soviet buildings here, its
pretty clear that the entire city will have to be recycled
over the next 20 or so years, a real estate professional
who doesnt work for MNGGF told me.
But real estate is a much easier business if real estate
prices are on the rise. This has been, and will continue
to be, the case in Ulaanbaatar for years to come. With
overall economic growth rising, people have more
money... and they want to spend it in restaurants and
stores. That helps push up rents.
Rising wealth also attracts international companies.
Theres an Ermenegildo Zegna, a mens luxury store,
next door to Louis Vuitton. There are other high-end
luxury retailers on the way. You can get fried chicken
at just one KFC in town... but its only a matter of time
before McDonalds and Starbucks fnd their way to
Ulaanbaatar. And theyre all going to want to be on
Peace Avenue.
As a result, MNGGF has seen its rents move up 34%
over the past year in local currency terms... and thats
just the beginning. Rental rates for retail real estate on
the high street in Ulaanbaatar are still just a small frac-
tion of rates in other emerging markets high streets.
Even in a rising price environment, its still easy to
make a mess out of investing in real estate, though.
You can get ripped off if you dont know the market...
contractors and builders can cheat you... your own
employees might be in business against you... you
might wind up with deadbeat tenants or you might
get nickel-and-dimed to bankruptcy through petty
corruption. These potential challenges are magnifed
if the market turns against you.
But MNGGF has been insulating itself against a lot of
these risks since it launched in February 2011. Let me
explain
Investing with the Leaders
in Mongolias Real Estate
Harris Kupperman, the companys founder, was an
American hedge-fund manager who saw an opportu-
nity in Mongolia. He fgured out a way to exploit the
underdevelopment of the real estate market in Mongo-
lia, which was lagging the growth of the economy.
In every market, theres going to be someone who gets
in early to do what has worked in dozens of other mar-
kets around the world... Harris was frst in the door in
the Mongolian real estate arena.
From the beginning, Harris made it clear that he was
in Ulaanbaatar for the long haul. That helped attract
the strongest professionals in the market and retain
them as the company grew.
Theres no magic potion to building a successful
business as a foreigner in a market like Mongolia. But
building a business around a core of talented local
professionals who have international education and
experience but also understand the local context
is a good start. Finding the right people isnt easy,
though... Harris told me that he has probably inter-
viewed around 1,000 people to fll 25 positions.
You see, in a market like Ulaanbaatar, you have to be
local.
If youre a foreigner walking into town looking for
something to buy, youll pay twice as much as some-
one from around here who knows how the market
operates... Thats just the way things work, Harris
told me.
As a local frm with roots throughout the business
community (in small markets like Ulaanbaatar, every-
body knows everybody else), MNGGF enjoys advan-
tages that parachute bankers investors who visit
only every so often dont. Harris told me that local
banks give MNGGF access to lists of non-performing
loans (loans that are past due) that they have on their
books... and theyre willing to negotiate to sell these
properties quickly.
If you can get a property at 60 cents on the dollar,
youre already a long way ahead, Harris said. And if
youre on the ground, and ready to do due diligence
and sign the paperwork tomorrow, youve got a huge
competitive advantage.
At least as importantly, MNGGF promotes from within,
and encourages its employees to improve their skills.
This makes them more valuable to the company... and it
also improves the chances that theyll stick around. Har-
ris told me that in the history of the company, only one
employee he didnt want to lose went to another frm.
But the way to lift a well-run local frm to one that could
hold its own with similar companies anywhere else in the
world is to bring in an international-caliber professional
who has deep and broad experience in the industry and
has built similar companies from the ground up before.
It wasnt easy, but Harris eventually found Paul Byrne.
Earlier in his career, Byrne helped develop the Hong
Kong airport and the new World Trade Center in New
York. More recently, he headed up a major real estate
development frm in Dubai, in the United Arab Emir-
ates, where he was in charge of 15 malls, 10 hotels and
resorts, and seven mixed-use developments spread
over 12 countries in the Middle East.
After spending a few months as a consultant for MNG-
GF, Byrne joined the company as CEO in March. He has
continued the process of disposing of small, labor-inten-
sive properties (MNGGF has around 65 different proper-
ties), focusing on larger assets that are more proftable.
Byrne is laying the groundwork to bring more large-
scale development projects to the frm, sharing risk
with external investors who can also borrow money at
better rates than whats available to MNGGF.
And Byrne is light years ahead of the rest of the market.
There arent many developers here who are good at
staging, he told me.
Ideally, in a big development, you want to fnish and rent
out one part, while youre still working on completing the
rest (whats known as staging). That way, you can use
cash fow from the rent to cover your interest expense.
People here too often try to fnish the whole thing at
once... and go bust before they can rent out any space.
And MNGGF is going to continue to stay out of build-
ing apartment buildings.
Residential is too easy... I prefer businesses where the
barriers to entry are higher, Byrne told me.
Eventually, he wants to roll MNGGFs properties
into a real estate investment trust (REIT) structure.
Among other advantages, this structure could more
easily borrow money to invest in projects.
On another front, Byrne is going to develop the com-
panys property-management business, that is, man-
aging other peoples property for them. Done correct-
ly, this can be hugely proftable... and in a market like
Ulaanbaatar, there isnt much competition.
One question I had before speaking with Byrne was
his motivation: Why would a guy who could retire
to a sunny island or, at any rate, get any job he
pleased anywhere in the world sign up for a fve-
year stint in Ulaanbaatar?
There was one simple answer: Money. In terms of the
ability to build from a low base, Mongolia is unique,
Corruption in Mongolia
A challenge that often confronts small, foreigner-
run companies in emerging markets is that they're
an easy target for small-time thugs looking for
"protection" money... and for various government
inspectors who assume that the rich, clueless people
from out of town will readily pay them to go away.
In Moscow, businesses ranging from the old
grandma selling onions from her garden on the
sidewalk to the big bank I used to work for are
regularly shaken down. (My employer had an
entire "government relations" team comprised pri-
marily of former security-services agents to keep
sticky-fngered regulators and inspectors at bay.)
Harris laughed when I asked him if MNGGF has
to pay people off.
"People try sometimes... They say, 'You'll get this
permit, and it will take a year. But you could get it
tomorrow, if you wanted.' So we say, 'OK, we'll wait
a year!' And we do."
It also helps that Mongolia is a small place where
it's not diffcult to meet high-level decision makers
who can help bypass petty bribery. And as MNG-
GF is one of the larger foreign investors in Ulaan-
baatar, the government is eager to make sure that
its experience can serve as a good example for
other potential investors.
Mongolia's standing Transparency International's
Corruption Perceptions Index, which measures
levels of corruption in different countries, has im-
proved dramatically in recent years. It has fallen
from 120 (the higher the number, the more corrupt
the country) in 2009, to 83 last year. It has a long
way to go... but that's extraordinary progress. With
more frms taking a stand like MNGGF, Mongolia's
progress will be all the faster.
MONGOLIA'S CORRUPTION
PERCEPTIONS INDEX RANKING
2009 120
2010 116
2011 120
2012 94
2013 83
Source: Transparency International
he told me. Its a blue-sky opportunity. The country
has a huge natural resource base. And its ignored.
What also appealed to Byrne was that he was walking
into a great situation. MNGGF is in a sweet spot. We
have frst-mover advantage here. Harris found the
best people, and were building from that. So were in
a perfect position.
Byrne bought shares of MNGGF when he joined, and he
has been paid mostly in share options, rather than cash...
so hell only make money if MNGGFs share price rises.
I see this as a $1 billion company, he told me. And giv-
en that the last company that he ran was several times
larger than that, chances are good hell be able to do it.
But sentiment toward MNGGF mirrors investor attitudes
toward Mongolia... Investors arent paying attention.
Harris, who is now the executive chairman (now that
Byrne is CEO), spends a lot of time on business devel-
opment and investor relations. He was recently on a
long marketing trip to talk to investors about MNGGF.
Three years ago, we had no capital, no business plan,
and three employees... and we had over 300 people
who wanted to hear what we had to say, he said.
This year, we have one of the largest real estate
companies in the country, 45 employees, and a new
CEO... and we had less than 100 investors attending
meetings with us.
Over the past year, MNGGFs share price has been in a
steady downtrend... which was interrupted by a sharp
rally a few months ago, just after Byrne joined the
company. Since then, shares have drifted back down.
Are MNGGFs shares cheap today?
If you look at the book value of all the real estate assets
held by MNGGF, and add the value of the real estate man-
agement company, its probably close to the companys
current market capitalization of around $75 million. So at
frst glance, the company doesnt look all that cheap.
But the book value fgure is discounted heavily be-
cause of numerous accounting oddities. For example,
a property that is waiting on a particular license might
be marked down by a quarter, only to be marked back
up when the license comes through.
A property purchased at well below market value nev-
ertheless appears on the books at the price at which
MNGGF bought it.
And book value doesnt account for the sharp growth
in rents that MNGGF is charging... or for large capi-
tal appreciation as the underlying value of MNGGFs
assets rise.
MNGGF is an unusual opportunity. Its an indirect
play on what will likely be a continued boom in a
small but rapidly evolving economy. Ulaanbaatars
real estate is deeply undervalued... and MNGGF has
put together a portfolio of many of the citys most
attractive assets. Rising rental income plus capital
appreciation should power growth.
The companys strong roots, coupled with Byrnes
unique experience in the feld, will give MNGGF
an enormous edge. Finally, the fact that Harris and
Byrne will only make money if the share price goes up
ensures that everyones objectives are aligned.
As soon as investors pour back into Mongolia, MNG-
GF will be one of the frst companies they look at.
Were not buying MNGGFs shares for a quick return...
This may take a while. But I can see a very credible
roadmap for the share price increasing several times
over in the next few years.
Buy Mongolia Growth Group (OTCMKTS:
MNGGF) up to $2.50. Use a 40% trailing stop to
protect your capital.
Were using a wider stop than usual because of the pos-
sibility for volatility in Mongolian stocks. MNGGF offers
an excellent value at current levels, but shares might
bounce around a lot before they move up. I want to be
sure we dont get stopped out of the stock while were
waiting for the market to realize the companys value.
How to Buy MNGGF
You can buy MNGGF either on the Nasdaq, on the
pink sheets (ticker MNGGF), or on the Toronto
Venture Stock Exchange (ticker YAK). Ill be fol-
lowing the Nasdaq share price.
Whats Contrarian Now
Country
Price-To-Earnings Ratio
(1-Year Forward)
3-Month Market Performance*
6-Month Market
Performance
3-Month Local Currency
vs. U.S. Dollar*
6-Month Local Currency
vs. U.S. Dollar
Venezuela 12 -20% -7% 0% 0%
Ukraine 3 -9% -16% -34% -44%
Russia 5 -4% -9% 3% -5%
On My Radar
Clashes between protestors and the government earlier in the year helped push the Venezuelan market down.
Years of political and macroeconomic mismanagement are continuing to take their toll, making the country's
stock market one of the worst-performing in the world this year.
Ukraine's economy is forecast to shrink by 5% this year, in part due to Russia's involvement in the country. Al-
though funding from the International Monetary Fund will help stabilize the economy, investment will remain low
as long as geopolitical uncertainty looms over the market.
Russia's markets have moved up in recent weeks despite continued uncertainty over its objectives in Ukraine. As
long as geopolitical risk remains high, Russia's stock market will likely remain one of the world's cheapest.
Source: Bloomberg * In U.S. dollar terms
The S&A Global Contrarian Portfolio Review
I have a brief update this week focusing on our Ka-
zakh bank Kazkommertsbank (LSE: KKB).
Shares are down around 40% from their highs in
early April (although were still up 27% from our entry
point). We knew this would be a rocky ride and it
certainly has been.
KKBs shares are down for two reasons. First, the
company recently posted weak frst-quarter results.
Net income was down 86% from the previous quar-
ter, and non-performing loans rose to 36.1% of loans
outstanding, from 32.4% as of the end of last year.
Net interest margin, a key indicator of proftability for
banks, also declined.
Some of this weakness was related to foreign-ex-
change losses following the devaluation of the Ka-
zakh currency in February. But the results also show
that KKB, and the Kazakh banking sector, still have
a long way to go.
The second big reason for the drop in KKB was that
the European Bank for Reconstruction and Develop-
ment (EBRD), a developmental lender and investor
active throughout Eastern Europe and Central Asia,
sold its 10% stake in KKB. The EBRD sold its shares
to the main shareholder of KKB, who is also chair-
man of the board.
The fact that EBRD was a shareholder in KKB provid-
ed a measure of comfort to other shareholders, be-
cause its a big, important regional investor that would
look out for the rights of minority investors. We dont
have that protection anymore.
So the story has changed somewhat but well still
do well holding shares of KKB. As Ive said before,
the Kazakh government has made the stabilization
of the banking sector and reducing the level of
non-performing loans throughout the industry
a top priority.
And KKB, in combination with BTA (the bank its
merging with), is the biggest bank in Kazakhstan. The
government wont let it fail. KKB is a buy up to $2.
Whats Next...
Next week, Ill be is traveling to a country that has
been stealing headlines recently for all the wrong rea-
sons Thailand.
Two days after declaring martial law but saying it
wasnt a coup, the military on Thursday went on
television to announce that it is taking control of the
government. This comes after six months of political
turmoil which is only part of the eight years of on-
and-off strife the country has endured between the
same two groups that are fghting each other now.
Some of the people Ive been in touch with in Bang-
kok, Thailands capital, have warned me that they
cant talk politics because it could land both of us in
hot water with the authorities. And the military imple-
mented a nationwide curfew in effect from 10 p.m. to
5 a.m. every night.
This is the 12th coup in Thailand since 1932 so its
nothing all that new for people there. But its hurting
investor sentiment, and might be just the sort of setup
we look for in the S&A Global Contrarian. Ill have
more details for you soon.
Regards,
Kim Iskyan
May 23, 2014
The S&A Global Contrarian Portfolio
Prices as of May 22, 2014
Stock Exchange Ref. Date Ref. Price Recent Price Dividends Return Industry Advice Stop Price
Kazkommertsbank (KKB) London 12/19/13 $1.56 $1.98 26.9% Banking
Buy up to
$2.00
$1.17
Sprott Physical Platinum &
Palladium Trust (SPPP)
NYSE ARCA 1/24/14 $9.17 $10.10 10.1%
Precious
Metals
Hold $6.88
Dragon Oil (DGO) London 3/24/14 575p 585p 11p 3.70% Energy
Buy up to
630p
431p
Mongolia Growth Group
(MNGGF)
Nasdaq 5/23/14 NEW $2.16 NEW
Real
Estate
Buy up to
$2.50
$1.30
Our Current Contrarian Positions
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