Asia’s Best-Kept Growth Secret
The Mongolian stock market was the world’s best performing in 2010 when it doubled. It followed up with a 58% return last year. Even so, it’s one of Asia’s smallest stock markets. This year, it’s been flat to down. But if the Mongolian boom follows the trajectory of other booms from Kazakhstan to Vietnam, the stock market could rise five- to 10-fold before it is all over.
Short of opening a brokerage account in Ulaanbaatar (which I did), it’s not easy to buy Mongolian stocks. I met with the only fund I know of that is open to Americans and specializes in Mongolian stocks: the Khan Mongolia Equity Fund. I subsequently exchanged emails with the manager, Travis Hamilton. What follows are notes from that exchange.
Travis was eloquent in his view on Mongolia’s exciting story. He told me how Mongolia is emerging from the shadows of almost 700 years of occupation and oppression. “Mongolia is experiencing phenomenal growth,” Travis said, “growth not seen since the last of the great Khans.”
He went on to note:
“Within the next couple of years, the country will have the potential capacity to affect global coal prices and will be one of the largest copper exporters in the world. The country possesses a massive resource endowment and is literally on the doorstep of the world’s largest and growing commodity consumer. With poor infrastructure, a small population and masses of required development needed in order to extract the country’s mineral riches, there are ample investment opportunities.”
Mongolia has a business-friendly environment, in his view. But there are always risks. I asked Travis what worried him. As in all frontier markets, Travis pointed to governance issues and the lack of transparency. He emphasized the importance of working with local, experienced and trustworthy partners.
“Fortunately, we have a strong onshore presence and a solid working partnership with one of the country’s oldest investment banks, Monet Capital,” Travis said.
Because the opportunity in Mongolia is so new, the funds that exist are also pretty new. Khan does not have much of a track record to point to. The fund has 70% of its assets in natural resources, so it’s suffered of late. But Travis sees opportunities in other sectors as new listings arrive in the coming months.
“Many stocks within the portfolio continue to test new 52-week lows,” Travis wrote. “We continue to average down and accumulate more of our high-conviction positions in light of current price weakness… We believe that certain stocks are trading at deep discounts to even modest estimates of value. And these are likely to bounce hardest on the return of (more) rational markets.”
I asked about the valuation of Mongolian equities.
“In short: CHEAP,” Travis wrote. But he readily admitted stocks can be hard to value, given the massive growth rates.
An example is Remicon, a maker of concrete. Remicon ranks third in the local concrete market but will double capacity such that it will take the No. 1 spot by 2014. By 2016, Remicon’s earnings could rise more than sevenfold. Yet the company trades for only 8 times trailing earnings.
Travis shared his thinking on Remicon:
“For Remicon, the business currently commands just over 10% of the local concrete batching market. They are vertically integrating to cement production. Currently, Mongolia produces less than 30% of the cement it consumes. This is a very interesting angle for us to play the construction boom in Mongolia — but also the required mine site development angle.”
I visited Remicon on my trip to Mongolia. And I remember coming away thinking that concrete and cement were the places to be in Mongolian equities. With all the construction on tap and the shortage in domestic supply, the opportunity for Remicon is tremendous.
I also visited the largest beverage maker, APU. I toured its plant, which struck me as an impressive operation. APU along with Remicon are the two biggest positions in Khan’s fund. As Travis points out, “It is difficult to value these businesses on current earnings, given the massive growth in their respective industries/sectors… In an economy that is expected to achieve 23% real GDP growth this year — or almost 38% nominal GDP growth — earnings multiples have the potential to expand significantly.”
Khan also invests heavily in mining companies at all stages of development, which have hurt performance of late as commodities sold off. Still, mining is a big part of the economy here, and Khan has found some intriguing plays. Haranga Resources is one, an iron ore explorer that lists in Australia and whose chief asset is the Selenge project in Mongolia. Haranga is backed by Garrison Capital, which brought Hunnu Coal to the market in 2010 and wound up selling it for 800% of its listing price. Khan believes Haranga has a high-quality deposit and offers huge upside.
To find and invest in these kinds of deals requires on-the-ground expertise. Travis elaborated on Khan’s robust investment process:
“For us, fundamental company analysis is key. We evaluate management, the board’s experience and independence and accessibility of both. We also value Western or international experience. We look for transparency and sound accounting practices… These are all key areas of investigation for us. We undertake regular company visits and meet with management. We will not invest unless we can trust the board and the management, regardless of how good the numbers appear.”
Khan’s fund is pretty small at just under $5 million in assets under management. It is also new, without a track record worth citing. The fund got started at a bad time.
“Our initial offer period was September 2011 — perhaps one of the worst three months over the last decade to launch a new fund,” Travis wrote. “We self-seeded the fund with a small circle of friends and a family pot of just under $1. While markets remain challenging, we have yet to have any redemptions.”
The fund’s investors seem committed to the vision of what Mongolia could be.
“From our perspective,” Travis continued, “there has never been a better time to invest in the Mongolian growth story — a nascent economy that will experience real double-digit GDP growth for the rest of the decade!”
I agree. Mongolia is a very exciting story.
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