Mongolia Growth Group: The Way To Play Mongolian Economic Recovery

| About: Mongolia Growth (MNGGF)

Summary

A combination of a resource bear market and bad government policy wacked the Mongolian economy.

Resource bear market appears to be over and elections in Mongolia have put a new government in power.

Mongolia Growth Group owns prime real estate in capital city of Ulaan Baatar selling at a significant discount to NAV.

Several years ago Mongolia was the darling of frontier market investors. In 2011 the economy expanded by a whopping 17% on exports of coal and other minerals, mostly to China. Wags were calling the country "Minegolia" due to its several trillion dollars of in the ground copper, coal, gold, and other resources.

However, the shine came off as the Chinese economy began to slow and Mongolia's main exports lost value as prices for commodities entered a bear market.

As the economy began to slow negative sentiment was further exacerbated by poor government decisions. The main one being the passing of legislation banning foreign ownership of strategic assets.

This law being passed to block the acquisition of a coal mining company by a large Chinese mining company. This sent a negative message to foreign investors and foreign direct investment collapsed.

Fortunately the government realised the error of its ways and a new pro business prime minister was elected. He began the long hard road of rebuilding credibility in the Mongolian government and was able to repair quite a bit of damage to the county's reputation.

Nevertheless the damage was done and Mongolia has been mired in a severe recession for a couple of years. Recent elections were held in Mongolia and the ruling Democratic Party was routed severely. The opposition Mongolian peoples party won 85% of the seats in parliament.

The MPP will have a mandate to improve the economy and to implement austerity which the country will need due to the expansion of debt that was incurred by the previous government to compensate for a weak economy.

As they say "it is often better to be lucky than right" it appears that the wind has changed and Mongolia's fortune is changing for the better.

The five year long resource bear market seems to be abating. This is occurring just as Rio Tinto is set to commence the underground expansion of the Oyu Tolgoi copper/gold mine in southern Mongolia.

Although the expansion of the mine will not be complete until 2020, when a copper shortage is forecasted, the $5.3 billion dollars needed to fund the expansion should act as a stabilizer on Mongolia's $12 billion per year economy.

The Mongolian government appears to understand the errors of its past and has been courting foreign investment and has recently got billion dollar commitments form India, Japan, and Korea to invest in various infrastructure projects in the country.

An indication of the positive change in sentiment in the Mongolian economy is the continued improvement of the Mongolian Sales Managers Index which has been in a positive uptrend since the beginning of 2016.

One way for the average investor to take advantage of the improvement in the Mongolian economy is via Mongolia Growth Group (OTCPK:MNGGF). Mongolia Growth Group owns real estate, primarily high street retail and office space, in the capital city of Ulan Batar.

The company has suffered along with the economy in Mongolia as rental rates and real estate values have decreased. Nevertheless, the company is debt free and implemented an austerity program early last year to wrung out all unnecessary costs as a way to survive the economic downturn.

The company just published its annual report and I was impressed with the CEO Harris Kupperman's view that the company would continue to seek out cost reductions as it prepared the company for an inevitable return to growth.

I believe the shares represent a tremendous value at around $.40 per share. The recent book value of the shares is around $1.30 per share which gives quite a bit of room for error.

The company should be the beneficiary of a return to economic growth as many of its properties are located on main streets in the downtown and central business districts.

This is a highly speculative company but one that I believe is now seeing the economic winds shift form headwind to tailwind. Investors with experience in frontier and emerging markets seeking an above average risk/reward would be warranted in giving Mongolia Growth group an in depth look.

Disclosure: I am/we are long MNGGF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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