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John Polomny is an individual investor and speculator seeking unique, overlooked, and well researched opportunities and speculations from all over the world.
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  • Mongolia Growth Group July Shareholder Letter 3 comments
    Aug 27, 2013 3:41 PM | about stocks: MNGGF

    Forgot to post this last week:

    Some of you may be unaware, but the vast majority of the buildings in Ulaanbaatar are heated from a central grid system using steam. Recently, the city of Ulaanbaatar announced that there will be a moratorium on new heating permits for commercial buildings while some recently issued heating permits will be cancelled. This is due to an over-taxing of the existing heating system due to the rapid expansion of the city. While this will not impact us, as all of our buildings already have their heating permits, it will clearly impact people who are looking to build new buildings over the next few years.

    The Amgalan "Thermal Only" Power Plant, and Fifth Thermal and Electricity Power Plant are planned for completion in winter 2015 and winter 2016 respectively. These additional facilities will fix the heating shortage issues facing the capital city. However, until these facilities are completed, we do not anticipate many new commercial buildings getting heating permits. From a supply standpoint, this will likely serve to further amplify the already severe shortage of usable commercial space in Ulaanbaatar.

    At MGG, we have been planning certain renovation projects to reduce our own heat usage. We want to be seen as promoting lower energy consumption as it helps the environment and also as it helps the city to deal with the severe lack of spare heating capacity. Starting in August, we will be modifying certain heating equipment in seven of our buildings which will entail replacing obsolete equipment with modern Danish apparatuses. These fully computerized modern systems will maximize the heating system efficiency and eliminate unnecessary heat loss which, in turn, will result in significantly lower on-going building management costs. Finally, we will have automated systems that will serve to reduce our heat usages at night and at other times when full heat isn't required. In total, we anticipate that these renovations will reduce our own heat usage by approximately 30% and likely have a payback on the capital investment of under 3-years, due to lower heat usage in our buildings.

    As can be seen by the last few monthly letters, our goals at MGG are beginning to shift. During our company's first two years, we were focused on learning about the Mongolian market, acquiring assets and building the needed infrastructure to manage our company. Increasingly, our focus is shifting towards finding ways to improve the returns on our existing assets, dispose of underperforming and non-core assets, better manage our costs and generate cash flow that can be re-invested in our core property business. Simply stated, cash flow is now becoming our focus.

    My comments: The share price continues to drift lower and is now trading below $3.00 per share over the last few days. The continuing perception of uncertainty from the GOM, sliding Tugrik, general weakness in frontier and emerging markets, coupled with the fears of a worldwide economic slowdown may be the culprits in the sliding share price. The economy of Mongolia continues to grow by double digits and eventually that is going to be reflected in stock prices there (barring another psychotic break in markets). The issue with many building projects having to be suspended because of the overtaxing of the UB central heating system should bode well in the short and medium term for real estate prices. I did see that the GOM awarded a contract for the new thermal power plant in the last couple of days but it will not be in service until 2017. In previous letters MGG has said that their revenue should be up by 50% by the end of the year and as they have said in this letter the focus has shifted to cashflow and optimizing assets. If the price continues to drop I will most likely buy more shares.

    Disclosure: I am long OTCPK:MNGGF.

    Themes: Mongolia Stocks: MNGGF
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Comments (3)
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  • MarginOfSaftety
    , contributor
    Comments (9) | Send Message
     
    Hi John,

     

    Always enjoy your comments. I like the Mongolian LT story and the MGG way to play it so have two concerns and would like to get your feedbak.

     

    1) MGG has 98 employees or 4 times what Buffett has at BRK's headquarters. Not an apples to apples comparison but this seems like A LOT of folks

     

    2) Book value per share is about 1,32 for the first half. About 2/3 or this is property. Assuming property is worth twice its book (and ignoring fees, taxes to sell), net asset value is about 2.2. So even at current prices, one is still paying quite a bit above net asset value, right?
    31 Aug 2013, 01:31 PM Reply Like
  • John Polomny
    , contributor
    Comments (519) | Send Message
     
    Author’s reply » MOS,

     

    Thanks for your comments. Yes I agree 98 seems like alot. Regarding issue number one; MGG has said that they are going to divest quite a few of the residential properties which require more staff and time to manage. This seems to be a bit of the 80/20 rule where it seems 20% of the properties are taking up quite a bit of the time. They are also looking to divest the insurance business Mandal. I am not sure if all of the employees for both businesses are being counted in your total or not. The company has said they are going to focus on cashflow going forward so that would lead me to believe headcount would part of that equation.

     

    The second point is subjective in my view. Are the properties being carried on the books at their acquisition costs? How often are they revalued? How are they valued? Do the values consider the improvements made to the properties? You can't mark to market a property business every quarter as it would require a ton of work and cost alot of money. 32% of the current property portfolio is classified as re-development and is generating no revenue. How much did it cost to acquire, what is it worth currently, and what will it be worth when it is redeveloped and generating revenue?

     

    I think the case could be made that the book value is understated. The company has said they expect revenue to be 50% higher by yearend. We know that the economy, even with all the nonsense from the GOM, is growing high single digit to low double digit. The city is confined by the mountains and now the moratorium on new hookups to the central heating grid which will constrain supply of space in the short to medium term. The GOM seems to have learned their lesson and is now poised to be more open to FDI, at least that is what they are saying. OT is in production and generating revenue. We also have the model of what has happened to property values in other resource rich countries as they begin producing their resources on a large scale. We are at that inflection point in Mongolia. I look at MGG as a perpetual call option on Mongolian GDP growth over the next 5-10 years.

     

    I have been nibbling at the shares as they have drifted below $3.00. However it is possible because of all the percived bad news from Mongolia and the general fact that emerging markets are out of favor that the shares could drop significantly. I do not know however it is my view that if my thesis plays out on how the Mongolia economy pans out over the next few years that these shares should trade higher. This is a speculation of course and there is no definable "margin of safety" that you can say makes the shares undervalued.
    2 Sep 2013, 03:54 PM Reply Like
  • MarginOfSaftety
    , contributor
    Comments (9) | Send Message
     
    Thanks John!
    3 Sep 2013, 02:51 AM Reply Like
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