A Mongolian IPO
Last Thursday I spoke about leveraging capitalism. I made the point, with a bit of help from Chris’s last post, “Leverage – Why Here? Why Now? that Mongolian real estate might be a good long-term speculation.
Over the last several months we’ve gotten to know a few of Mongolia’s brightest entrepreneurs. Real estate has been a big focus for most of them. Without a doubt, one of the most successful has been Lee Cashell. You can read an extensive interview that I conducted with Lee in our special report onInvesting in Mongolia. If you don’t have it you can download it here.
I also interviewed Lee last week, but I focused more directly on the floating of APP, his Mongolian-listed property play. APP is the newest issue on the Mongolian Stock Exchange, so it’s generating a lot of excitement. The price is rapidly appreciating, and we wanted to catch up with Lee before the rest of the herd.
Mark: Lee we’ve spoken a few times about Mongolia with you, and you’re featured prominently in our special report on Mongolia. Today I want to ask you more specifically about APP, the company you just floated on the Mongolian exchange. But first, you run quite a few businesses in Mongolia, give us an overview.
Lee: Asia Pacific Investment Partners is a ten year old company incorporated in Hong Kong which owns and operates ten companies inside of Mongolia. The companies are in the real estate, mining and financial services industries and the largest of the ten companies are the property development company and Central Asian Cement, which is a cement producer. The company has about 200 employees and is currently planning a listing of the entire group on the Hong Kong stock exchange in late 2012 or early 2013.
Mark: Ok, so what’s the deal with APP? Is it an asset gathering play?
Lee: Asia Pacific Properties is a new company that was formed to hold several of our real estate businesses and also give APIP a representative listing on the Mongolian stock exchange. As one of the largest integrated real estate companies in Mongolia we feel that it is important for us to have a company on the Mongolian stock exchange which offers investors access to one of the most active real estate companies in the country.
The businesses we have decided to inject into APP are the Rural Development Corporation, the Property Trading business, and the Property Development Division that specializes in “smaller boutique residential buildings”. The larger condominium and mixed use developments will continue to stay underneath Asia Pacific Land and the main developer of the group.
The Rural Development Corporation was an idea we had about four years ago to leverage off of the growth of the mining activity that was happening in the Gobi Desert. As many people have heard, two of the largest mining deposits in the world are both located about 100 kilomters of each other in the Gobi Desert. This of course has spurred economic growth in the area. We decided to make a number of investments there into the small commercial buildings that can be rented out as stores, restaurants and various other small businesses that one generally finds when you have a mining boom. Our inspiration is the old saying that the people who really made the money in the San Francisco gold boom were the people selling picks and shovels, as well as real-life examples includig Levi’s jeans and Folger’s Coffee. In this case, we are really standing by our competitive advantage of buying and renting real estate. If Levi’s was participating in the Mongolian gold boom they would probably be renting one of our stores.
Mark: You’ve mentioned before that you’re working towards a US$50 million market cap for APP. What sort of PE would we be looking at with that valuation, and what sort of PE are we looking at now?
Lee: The income for this, since we just started, is expected to be quite modest, but the good news is that the first property development we are doing inside the company, which is called The Oasis Residence, is currently about 40% sold. We expect to be 100% sold over the next 6 months. This building should bring about US$4 million in profit to the company, and the other two businesses should add about another US$1 million, bringing us up to US$5 million for next year. The average PE ratio now on the exchange is around 30X, although because of the illiquidity it is difficult to get a good average figure. In any case, we will be happy with anything between a 20x and 30X PE ratio.
Mark: Liquidity is a major issue on the Mongolian exchange. You also own a Mongolian broker/dealer. First, what’s it like operating a broker/dealer in such a fledgling market?
Lee: Well, it has really been a game of patience since we have been waiting for five years for the liquidity to increase. We have had a couple of liquidity spurts but we are still expecting a normalization of the exchange with increased investment, trading hours, IPO’s and of course liquidity. Of course with low liquidity brokers can make a lot of money, so we haven’t built up a large infrastructure within the company yet, and are planning to expand the brokerage, called Asia Pacific Securities, in line with the growth of the turnover of the market.
Mark: And, how does owning your own broker/dealer help you create liquidity for APP and your investors?
Lee: Well, it helps alot, we are the main market maker for the company and the main broker to the parent company, Asia Pacific Investment Partners, which is the largest shareholder of APP. The brokerage arm will of course remain the most active market maker for the stock, but it is clear that other brokerage firms are excited about participating since this is one of the only new issues to hit the market this year.
Mark: We’ve heard that Sam Zell and others are now seriously looking at Mongolia, and we’ve even spoken to one of our contacts that has already had a meeting with Zell. What’s going to happen when all that capital (billions) tries to find a home in Mongolia? Where is it going to go and how are you positioning ahead of it?
Lee: It will be difficult for Sam Zell or any other large real estate players to come in and invest large sums of money in the Mongolian real estate market right away because there are very few strata title buildings available for sale in the country. That means they will be forced into trying to get involved in property development, which significantly increases their execution risk as well as requires on the ground management of projects. In either case, more money is definitely coming into the property market, and as one of the leading developers in the city we are definitely well-positioned to continue to sell property. However, perhaps more importantly we hold the largest land bank of any developer in the country and therefore have the ability to sell out land should we choose to, or else continue to develop top-quality buildings over the next ten years.
Mark: Outside of APP, what’s the best way for small individual investors to approach the Mongolian investment opportunity, longer term?
Lee: Well, within our group we offer numerous ways for people to participate. Firstly, people can invest into the stock market, including APP, through our brokerage arm called Asia Pacific Securities; secondly, they can invest into real estate, either into one of our developments or through the dozens of opportunities we have through our real estate agency Mongolian Properties. We were the first real estate agency in the country and remain the largest by far. We have a successful record of serving international clientele for ten years. We currently have about fifteen agents and I have trained them all myself, so they provide excellent service.
In addition, investors could consider putting some funds into a bank account in Mongolia that is generally yielding above ten perent for Mongolian currency deposits. We also have a lending arm called Asia Pacific Finance, and we regularly borrow funds from our circle of investors, offering them 10% interst on USD or MNT for credit lines spanning anywhere from 6 months to 3 years.
Mark: If you were just coming to Mongolia for the first time, capital in hand, what would you focus on today?
Lee: Like everywhere one should consider diversification, so I would put some money into the stock market, some into property and some into a bank account in Mongolian Tugriks in order to get both the interest rate, as well as any possible currency appreciation.
Mark: There are enormous opportunities in Mongolia, on that I think we agree. During every bull market you’ll still find guys who manage to lose their shirts. With that in mind what sectors in Mongolia do you think pose the greatest risks to investors?
Lee: Probably mining is the biggest risk because there are constant discussions within the Mongolian government about amending laws, increasing taxes and forbidding investment into this sector, or that specific geography of Mongolia. The other industry that I have seen take a hit is construction. When the last financial crisis hit all of the banks pulled their loans from construction companies and a number of projects were stopped half-way finished.
Lastly, investing directly into a private company in Mongolia without a very good legal contract, a strong presence on the ground in Mongolia and a clear path to an exit is also a no-no. Our main company, Asia Pacific Investment Partners (APIP), is currently private and headed towards an IPO on the Hong Kong stock exchange. We have a ten-year track record of growing profits and excellent corporate governance, yet we would only extend the invitation to invest into our company to very savvy, experienced international investors that qualify as high-net worth sophisticated investors. Although private company investments sometimes have outsized returns, they also have significant execution and liquidity risks, especially in the emerging markets. I know you guys focus on this area, so you know what I’m talking about.
Mark: Absolutely, we do… That being said, the “risk off” trade that has dominated global capital markets for the last few months has to a large extent side-stepped the MSE. Can you give us your views on this?
Lee: Well, during 2008 Mongolia was still booming from its previous year of 2007 which saw a growth rate of 9.5%. As the world was reeling from the Global Financial Crisis (GFC) everything seemed peachy in Mongolia until 2009 came around, and that’s when we saw the effects of the GFC hit Mongolia. I therefore expect some modest slow down in Mongolia for next year, which quite frankly I welcome because things are growing a bit too fast for the infrastructure of Mongolia to keep up. I would prefer Mongolia grows at 10% a year for the next ten years, rather than at 30% for the next three years.
Mark: Does a lack of liquidity in the event of a downturn bolster the market due to investors preferring to hold rather than sell, knowing that the lack of liquidity could work adversely for them in such a market environment?
Lee: Well, frankly the lack of liquidity gets worse when the economy slows down and there is a perceived “crisis” somewhere around the world, but that also needs to be juxtaposed against an increasing knowledge and interest in Mongolia, and the lack of investment opportunities in general, which keeps the overall investment into the Mongolian stock exchange increasing slowly but surely.
When I look at the decreasing interest rates of savings deposits (They used to be 20% per year and now are down to 10% or 11%) I can see the right ingredients for a surge in the Mongolian stock exchange. Lowering interest rates, increased awareness and investment, new technologies and cooperation with the LSE and most importantly strong growth in corporate profits, points to a very promising year for the MSE.
Mark: Thanks Lee, that was great information for our subscribers.
Lee: My pleasure.
Mark again… Clearly Mongolia could provide investors with the proper perspective and time horizon immense opportunity. We recommend you listen to experts like Lee, who are on the ground, hacking it out day in and day out. We’ll continue to bring you updates and opportunities as they present themselves.
“Wherever you see a successful business, someone once made a courageous decision.” – Peter Drucker