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Mongolia - When Will the Stock Market Reflect the Improving Economy?


Dear Investors and Friends,

As part of our continuing on the ground research, Thomas Hugger, CEO of Asia Frontier Capital and Fund Manager of the AFC Asia Frontier Fund, traveled to Mongolia recently. Photos are by Asia Frontier Capital.

As usual, I planned my yearly trip to Mongolia for the month of September when the historical average daily high temperature in Ulaanbaatar, or in short “UB”, is +16 degrees Celsius and the daily average low temperature is +1 degree, compared with a range of +7 to −8 degrees in October and −14 to −27 degrees in December and January. Bear in mind that Ulaanbaatar is regarded as the “coldest capital city in the world”. Luckily, the weather forecast for the time of my trip was excellent with daily sunshine and high temperatures of up to +25 degrees!

Travelling during the months of July and August to Mongolia for business is also not advisable since in mid-summer the traditional Mongolian festival “Naadam” is held (since the time of Chinggis Khan). Naadam means “games” in the Mongolian language and these games consist of Mongolian wrestling, horse racing and archery "the three games of men" and are held all over the country and thus many of the inhabitants of UB travel to the countryside where they or their ancestors are from to attend the local Naadam and to visit their families.

Packing my luggage for this trip is also kind of special since the temperature in Hong Kong in September is about +32 degrees during the day and thus I had to pack my winter suit and also my winter coat which I normally only use for my trips to Mongolia, Switzerland and Uzbekistan. For a change, this year my winter coat was a needless item and was never used since the temperature in Ulaanbaatar was between +15 and +25 degrees during the day, and one evening I even had a delicious dinner outside at 7pm which is very unusual for end of September.

Travelling from my home in the New Territories to the Hong Kong Airport by car/taxi is normally a matter of 45 minutes, unless like two years ago a severe typhoon is hitting Hong Kong which can make the trip by road an adventure. However, this year I had to leave my home much earlier since radical pro-democracy supporters were planning to disrupt transport links to the airport, including trains, buses and further blocking the only road leading to the airport. Luckily, my flight was departing around 1pm and since the disruptions organized by the protestors normally only start by 2pm and last until midnight, I arrived with no problems at the airport.

The 4½ hour flight was on a MIAT Mongolian Airlines B737-800 jet which had an entertainment system installed but for some reason there was no programming (?) and was therefore boring and uneventful. Before landing at Chinggis Khaan International Airport we flew directly above the “New Ulaanbaatar International Airport” (NUBIA) which was constructed with Japanese assistance via a loan of USD 600 mln in January 2017 but until today this new airport, located 50 kilometers south of Ulaanbaatar, is yet to handle a single flight. Its targeted opening is now deferred to 2020 but nobody really knows for sure when. Even a duty-free company the AFC Asia Frontier Fund has successfully invested into some time ago, and which has a keen interest to tender for one of the duty-free shop spaces at the new airport, is still eagerly waiting for the opening which will potentially be a major boost to its business.

From the old airport an 18-kilometer drive will take visitors towards the business and government district of UB during which one can easily get a quick snapshot of the state of the Mongolian economy and especially the construction sector in Mongolia. After leaving the airport area, the road leads uphill to a plateau with a nice view over the Ulaanbaatar valley. Driving towards UB's city centre, one has to pass through a new residential district which was built during the past 10 years on land which was previously steppe. About 5 years ago (when the economy was doing well) I counted over 20 construction cranes and 2 years ago this number had fallen to about 8 (most of them at unfinished constructions sites) and needless to say, the general economy was not doing well then either. This time however, as I quickly counted the number of construction cranes on the horizon, I identified 15, most of which were on construction sites with large amounts of activity as work continued on Sunday in order to finish the major building structures before the harsh winter in Mongolia sets in, making it impossible to pour any concrete. My quick take on the construction sector was confirmed during the week when meeting with the leading concrete company in Ulaanbaatar which (finally) is showing early signs of a turnaround after about 3 years of a very difficult and hostile business environment. The turnaround in the sector was further confirmed by a company, whose shopping mall is exclusively hosting construction material related and hardware shops, is fully leased out and is now considering expanding its facilities in order to have more shops to rent out.

My crane observation was “re-confirmed” yet again when I visited, in the evening, “Sukhbaatar Square” which is basically the center of UB and is surrounded by the Government Palace, State Ballet and Opera House, various banks, hotels, a new shopping center, government offices and most importantly (for me) the beautiful building of the Mongolian Stock Exchange (MSE) which was previously a theatre during the Soviet era. As you can see from my photo below, various new high-rise buildings are starting to sprout up (UB's skyline is slowly but surely becoming like any other Asian capital city) and even the unfinished skeleton of a building, which has been dormant for nearly six years (building furthest left), is showing signs of construction activity.


Sunset over Sukhbaatar Square a: lot of construction is going on



Mongolian Stock Exchange building at Sukhbaatar Square



The economic numbers of Mongolia have improved considerably over the past 2 years and especially in 2019. For example, in the first 9 months of 2019, the foreign trade surplus reached USD 1.3 bln (USD 5.9 bln exports and USD 4.6 bln imports) which is an increase of USD 415.5 mln thanks to exports increasing by 12.6%, but it also needs to be noted that minerals and textiles make up 95.8% of exports. Coal exports for example are up about 5% (USD 312.5 mln) this year but coal is mainly sold to Chinese companies which shows the dependency which landlocked Mongolia has. Despite being the 19th largest country in the world, Mongolia only shares borders with China and Russia. Further, the export of semi-processed gold increased by USD 199.8 mln. Mongolia also recorded a household surplus of MNT 484 mln in the first 9 months (MNT 7.7 bln income and MNT 7.3 bln expenditure). The surplus was mainly due to higher income taxes, VAT and social security revenue. Tourist arrivals grew 10.7%, with 61.8% of tourists being from East Asia and 31.4% from Europe. Therefore, it is not a surprise that Mongolia was one of the few economies whose GDP growth forecasts by the IMF was upgraded from 6.3% to 6.5% for 2019 (the World Bank expects 6.9% growth) and from 4.9% to 5.4% for 2020. On the negative side, foreign investment into Mongolia has decreased in 2019 by 4% to USD 1.4 bln. The majority of foreign investment is for the Oyu Tolgoi project majority owned by the global British/Australian mining giant Rio Tinto.

However, the stock market in Mongolia is not reflecting the improved economic and financial situation. The MSE Top 20 Index is down −12.3% since the beginning of the year and leading stocks like APU (brewery, vodka and dairy) are down −10.6%, Gobi (cashmere) −21.1%, Tavan Tolgoi (coal mine) −8% and Talkh Chikher (bread and pastries) – 14.5% which resulted in historical low valuations such as a 10.2x trailing 12 month P/E for APU, 8.2x for Talkh Chikher, 7.7x for BDSec. (Mongolia’s largest brokerage company), 5.8x for Mandal Insurance or 3.9x for Bayangol Hotel. Also, last year’s shooting star of the MSE, the internet based micro lending company LendMN is down −32.3% this year, now trading at an undemanding P/E of 9.9x.


MSE TOP 20 Index

(Source: Bloomberg)


During the week I met with companies from multiple sectors including agriculture, construction, consumer, insurance, mining, and I came away from these meetings noticing a definite turnaround of the businesses climate compared with last year. Currently a generally positive business outlook prevails for the coming 12 to 24 months with the exception of the mining sector. I used the opportunity to submit “dividend claim” letters on behalf of the AFC Asia Frontier Fund as some companies we have invested in, like many companies in Mongolia, still don’t provide automatic dividend payments to either the fund’s account with Mongolia’s Central Depository System “CDS” or to the fund’s bank account. In one case I even collected the dividend in cash!


Thomas Hugger receives the dividend of a Mongolian company in cash!



Thomas Hugger checks the dividend amount


The question remains, why is the stock market in Mongolia not reflecting the improved economic situation? As usual, I had a meeting with the CEO of the MSE, Khangai Altai, to discuss the strategy of the exchange and the market outlook and also gave him my view and shortfalls of the equity market in Mongolia. The major problems identified are:

  • No custodian service for Mongolian equities provided by international custodian banks
  • Mongolia is not included in any frontier index like MSCI or FTSE
  • Low liquidity (the daily average volume for the first 9 months of 2019 was USD 118k) and small market cap (below USD 1 bln)
  • Ongoing uncertainties regarding foreign investment due to the Oyu Tolgoi saga with Rio Tinto
  • Difficulty in opening, and operating a trading / custody account from outside of Mongolia for foreign investors (like collecting the dividend in person and in cash or repatriating sale proceeds)
  • No dual listings – except Erdene Resource Development (ERD CN) but its shares are not fungible with Canada yet

It also seems that the Government of Mongolia will IPO its multi-bln USD coal deposit “Erdenes Tavan Tolgoi” (which is Mongolian for “five hills”) with a main listing in Hong Kong in the first half of 2020 and a secondary listing in Mongolia which could be a big boost for the MSE. This IPO has been postponed several times and the company has now been instructed to prepare the IPO-documents by end of February 2020 which is a challenging task.

I also had the opportunity to join an investor tour as part of the 17th “Discover Mongolia” Mineral and Mining Business Summit (thanks again to the organizers). We were briefed by the Deputy Minister of Mining and Heavy Industry about the achievements, future objectives and current issues of the most important business sector in Mongolia.

Thereafter, we visited the Central Bank of Mongolia where the delegation was briefed in detail about the monetary policy, economic outlook and especially about the challenging monetary conditions during the crisis years of 2016 to 2018. We also attended a small reception hosted by Mr. N. Bayartsaikhan, the Governor of the Central Bank of Mongolia, who was very hopeful that Mongolia would not be put onto the “grey list” of the FATF (Financial Action Task Force). However, on 22nd October 2019, FATF announced in Paris that Mongolia together with Iceland and Zimbabwe will be added to this list. This will lead to stricter compliance procedures by banks outside of Mongolia (something that AFC will also experience) when remitting or receiving wire transfers to or from Mongolia.


Parliament Palace and the notorious traffic jam in Ulaanbaatar



Finally, we went to the Parliament Palace (pictured above) and met with a member of the Parliament whom we could ask questions to after a short introduction. As the person was also a member of the “Responsible Mining Support Group with the Parliament” the discussion quickly turned to the “Oyu Tolgoi – Rio Tinto saga” in which the Government of Mongolia holds a 34% stake. Due to the recently announced delay of the second stage of the multi-bln USD project, the mood in the Parliament to end or renegotiate the “Dubai agreement from 2015” flared up again. It is noteworthy that Rio Tinto has invested USD 9.5 bln over the past 10 years, USD 2.4 bln of which has been paid as taxes or other payments to the Government of Mongolia or the provincial government (aimag). I was very surprised that this (in my view) “moderate” and “mining friendly” member of the Parliament also supported the idea of revisiting and renegotiate the so called “Dubai agreement” with the argument that she was elected by the people of Mongolia who want to have the agreement modified. Proposed modifications could include for example more transparency from Rio Tinto regarding the prices of copper sold, to building a power plant at the mine, providing more clarity on costs, and bringing forward the date when Mongolia start receiving dividends, which is currently set for 2041. Interestingly, one of the organizers of our investor tour worked as a top senior officer for Rio Tinto in 2015 and was also one of the signatories on behalf of Rio Tinto of the Dubai agreement. He reminded the Parliament member that the Dubai agreement was later an integral part of the USD 5.5 bln bailout package by the IMF in 2017 after Mongolia’s finances were hit hard in 2016 due to government overspending and declining revenues from commodity exports.


Share price of Turquoise Hill Resources (TRQ US)

(Source: Bloomberg)


Turquoise Hill Resources (TRQ US) owns 66% of Oyu Tolgoi “OT” copper and gold mine and is currently 50.8% owned by Rio Tinto. The market cap of the company is now USD 900 mln.

Like the chaos surrounding the Oyu Tolgoi saga, there is similar chaos on the streets in UB, which boasts 1.4 mln people. More often than not, many of the roads leading into the city are completely clogged with cars since there are no highways yet in the country and public transport, except for a few buses, does not exist. The parking situation in Ulaanbaatar is not much different since, if you are lucky enough to find a legal parking space, you will find your car completely surrounded by others upon your return! If you are again lucky, these illegally parked cars have their drivers’ mobile number displayed behind the windshield.

Reckless and illegal parking in Ulaanbaatar



For further reading, here are some interesting, relevant news links related to Mongolia:  

For information about the AFC Asia Frontier Fund click one of the following links:

I hope you have enjoyed reading this travel report. If you would like any further information about the AFC Asia Frontier Fund, please get in touch with me or my colleagues.

With kind regards,
Thomas Hugger
Fund Manager

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