Mongolia Growth Group’s Transition To A Merchant Bank

Summary

Mongolia Growth Group has transitioned from a real estate company to a merchant bank controlled by CEO and 23.5% shareholder Harris Kupperman.

In the last three years, the company has disposed of some real estate and invested the proceeds in public securities. This portfolio has 6-bagged.

The company has also launched an investment newsletter called KEDM with promising revenues.

There remains significant value in the Mongolian real estate investments.

brytta/E+ via Getty Images Note: This article references Mongolia Growth Group’s ADR. The primary listing of the company is in Canada, under the ticker YAK. Throughout this writeup, I will use YAK as a reference to the company. Trading liquidity on both exchanges is limited.

When Mongolia Growth Group ( OTCPK:MNGGF ) was last written up on Seeking Alpha in 2017, it was a commercial real estate company with assets in Mongolia. In the last three years, it has rotated some of the real estate assets into publicly traded securities, 6-bagged this portfolio, and built an investment newsletter business called KEDM that earned ~C$1.7m in fees in its first 3 months. Given the recent transformation the company has been undergoing, I thought it was worthwhile to explain the current investment opportunity.

Mongolia Growth Group can best be thought of as the personal investment vehicle of the CEO, Harris Kupperman. Harris Kupperman, or “Kuppy”, is CIO and founder of the hedge fund Praetorian Capital, blogger at adventuresincapitalism.com, author of KEDM.com and recurring guest at themarkethuddle podcast’s monthly special: Kuppy’s corner. Kuppy owns 23.5% of the shares in YAK and has continued to buy shares over the years. His most recent purchases were in October, just prior to the Q3 blackout, at C$1.20. Equally important are the inside purchases by CFO Walkden Genevieve, who has amassed a 4.51% stake in the company, mainly through open market transactions. Since 2017 she has invested C$350k of her personal money in the company, meanwhile only receiving a pre-tax salary of C$140k per year.

In the last Q3 MD&A , Kuppy details his future plans for the company. The company has amassed sufficient liquidity (C$26.2m in publicly traded securities, and ~C$1m in cash and digital assets) and has offset the corporate overhead costs with income from a subscription service. This gives them the financial flexibility to pursue other opportunities. In addition, there are tax limitations to growing the public securities portfolio beyond its current size. As you can read in the MD&A, the intention is to transition the portfolio into “both minority and controlling positions in various businesses – public and private – where they can influence the outcome of events, potentially exploiting valuation differences between public and private markets”.

For now, it is hard to put a value on such future plans. I therefore want to focus this article on the value of today’s portfolio, which can be divided into 3 buckets: Real Estate, Publications and Public Securities. Real Estate

In my opinion, it is only a minor overstatement to say that Mongolia has been in an 800-year bear market since the death of Genghis Khan. However, for a brief period in 2008-2011, the Mongolian economy was booming, driven by strong Chinese demand for copper and coal, both of which Mongolia has abundant resources. GDP growth peaked in 2011 at +17.5% and the economy has been in a continued downturn ever since. YAK purchased most of its property in 2011 and 2014 and has seen its value decline since.

As of Q3 2021, YAK owns property with a book value of C$14.8m. With the exception of a C$0.8m office building in Puerto Rico, all properties are in Ulan Bator, Mongolia. The Mongolian assets are roughly 2/3 rd retail real estate and 1/3 rd land. The income yielding real estate is capitalized at an average 9.7% cap rate.

Since the founding, there has been approximately 28m in net additions (investments – disposals) in investment properties (excluding the headquarters of YAK, carried at C$1.7m). The main reason for the much lower value at which the properties are carried at C$13.6m are C$16m in total negative FX adjustments booked since 2011, or a function of the weakened Mongolian Tögrök.

Since 2015, there has been approximately C$10m in disposals. The slow pace of disposals is partially a function of the limited liquidity and partially a function of the difficulties in repatriating large sums of cash out of Mongolia. The fact that disposals have happened around book value makes investors believe that the current book value, potentially with an illiquidity discount, is the maximum […]

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