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.