Note: This article refers to the ADR of Mongolia Growth Group. The company’s primary listing is in Canada, under the symbol YAK. Throughout this article, 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 about Seeking Alpha in 2017, it was a commercial real estate company with assets in Mongolia. Over the past three years, he’s turned some of the real estate assets into publicly traded securities, 6 bags of that portfolio, and created an investment newsletter business called KEDM that brought in about C$1.7 million in fees to the during its first 3 months. Given the company’s recent transformation, I thought it was worth explaining the current investment opportunity.

The Mongolia Growth Group can be considered the personal investment vehicle of CEO Harris Kupperman. Harris Kupperman, or “Kuppy”, is CIO and founder of hedge fund Praetorian Capital, blogger at adventuresincapitalism.com, author of KEDM.com, and recurring guest on themarkethuddle podcast’s monthly special: Kuppy’s Corner. Kuppy owns 23.5% of YAK shares and has continued to buy shares over the years. Its most recent purchases were in October, just before the Q3 blackout, at C$1.20. Equally significant are the inside buys of CFO Walkden Genevieve, who acquired a 4.51% stake in the company, mostly through open market transactions. Since 2017, she has invested CA$350,000 of her personal money in the business, while only receiving a pre-tax salary of CA$140,000 per year.

In the latest third quarter management report, Kuppy details its future plans for the company. The company has amassed enough cash (C$26.2 million in publicly traded securities and approximately C$1 million in cash and digital assets) and offset corporate overhead with income from a subscription service. This gives them the financial flexibility to pursue other opportunities. In addition, there are tax limits on the growth of the government securities portfolio beyond its current size. As you can read in the management report, the intention is to transform the portfolio into “minority and majority positions in various companies – public and private – where they can influence the outcome of events, potentially exploiting differences in assessment between public and private markets”.

For now, it’s hard to put a value on such future plans. I therefore want to focus this article on today’s portfolio value, which can be divided into 3 compartments: real estate, publications and public securities.

Real estate

In my opinion, it is only a minor exaggeration to say that Mongolia has been in a bear market for 800 years since the death of Genghis Khan. However, for a brief period from 2008 to 2011, Mongolia’s economy boomed, driven by strong Chinese demand for copper and coal, of which Mongolia has abundant resources. GDP growth peaked in 2011 at +17.5% and the economy has experienced a continuous slowdown ever since. YAK purchased most of its assets in 2011 and 2014 and has seen its value decline ever since.

As of Q3 2021, YAK owns a property with a book value of C$14.8 million. With the exception of a C$0.8 million office building in Puerto Rico, all of the properties are in Ulan Bator, Mongolia. Mongolian assets are about 2/3^rd commercial real estate and 1/3^rd Earth. Income-producing properties are capitalized at an average capitalization rate of 9.7%.

Since inception, there have been approximately 28 million net additions (investments – disposals) in investment properties (excluding YAK head office, increased to C$1.7 million). The main reason for the much lower value at which the properties are brought to C$13.6 million is the C$16 million of total negative currency adjustments recorded since 2011, or a function of the weakening of the Tögrök Mongolian.

Since 2015, there have been approximately C$10 million in disposals. The slow pace of disposals is partly a function of limited liquidity and partly of difficulties in repatriating large sums of money out of Mongolia. The fact that divestments have occurred around book value leads investors to believe that current book value, potentially at an illiquidity discount, is the maximum value that can be realized with these assets.

I believe the remaining assets have at least one significant upside option. I don’t have the exact coordinates of the various land assets, but all the land owned is around Avenue de la Paix, near Sukhbaatar Square, which is the heart of the city. If ever Mongolia gets its act together and Ulaanbaatar develops further, it is the first land to develop. This is the only land the Chinese can buy if they want to build an office that overlooks Sukhbaatar Square.

The same optionality argument holds for the Tuguldur shopping mall, which is less than 1 km east of Sukhbaatar Square. I think this option has real value. Not because of the high likelihood that Mongolia will pull itself together anytime soon, but the upside multiples in case they do. Ignoring this option, the real estate at book value is worth approximately CAD 0.53/share.

The real estate business also generated CA$170,000 year-to-date in service revenue, compared to CA$68,000 and CA$156,000 in 2020 and 2019, respectively. These are mainly real estate brokerage services.

Source: www.mongolia.com

Subscription products

In order to support the investment process at YAK, the company has started creating various event-driven investment monitors. Although it started out as a crowdsourced exchangeable data collection, it has since morphed into a weekly newsletter that goes by the name “KEDM”, or Kuppy’s Event Driven Monitor, after “Kuppy’s ED” was briefly considered but turned down. for obvious reasons. . In addition to the weekly newsletter, the subscription gives you access to a community, with a Discord room where event exchanges are shared in real time, and a monthly “happy hour” with various guests.

After almost a year of free trial, KEDM disappeared behind a paywall in July 2021. Subscriptions exceeded expectations and in the first 3 months, YAK collected approximately C$1.7 million in fees. The majority of these subscribers paid the promotional fee of $2,000, which will convert to the non-discounted price of $2,500 upon renewal, a growth of 25%. Additionally, subscriptions seem to be increasing by a few percent each month, although the MAC is difficult to determine.

YAK is actively investigating ancillary services they can launch and monetize. In addition, they are studying the possibility of acquiring other newsletters. While every newsletter business typically has key man risk, acquisitions can be accretive if newsletters can be sold across different user bases.

The proper valuation method is probably a multiple of revenue over next year’s revenue, which includes the 25% increase in subscription fees.

Source: www.kedm.com

Public securities

As mentioned earlier, when the Mongolian economy collapsed, YAK managed to divest itself of some properties and spin the proceeds into public securities. While 2018 and 2019 were tough years for value stocks, investment gains in 2020 and 9M 2021 were C$7.4m and C$14.7m, respectively. Although the exact IRR cannot be calculated given the unknown timing of disposals, returns for 2020 and 2021 were in the triple digits and 2020 likely exceeded 200%.

At the end of the third quarter of 2021, marketable securities totaled C$24.7 million. As of October 31, this amount had risen to C$26.3 million. This does not include C$0.8 million of cash on C$0.3 million of digital assets. When accounting for redemptions after the quarter, this amounts to approximately CAD 0.97/share in value.

The most important positions include Sprott Physical Uranium Trust (OTCPK: SRUUF)St. Joe Company (NYSE:JOE) and Valaris Limited (NYSE:VAL). I believe St. Joe is a great example where YAK’s research capabilities create value. St. Joe is a landowner and developer in the Florida Panhandle. The company traded at a fraction of the value of its land assets, but for many years it did not have the catalyst for a revaluation. It is also an asset where the value of the company is difficult to grasp without going there yourself. Kuppy’s field research and conversations with local real estate brokers allowed him to perfectly time the continued inflection of St. Joe’s development activities. St, Joe was a major contributor to YAK’s strong returns in 2020 and remains one of the largest positions.

As noted, there are tax reasons why this portfolio cannot grow beyond its current size and a portion of this portfolio will be directed to private investments or investments where YAK owns >25% of the outstanding shares. It is difficult to speculate on the amount of value that can be created this way. The strong triple digit returns of the past 2 years will be difficult to replicate.

Conclusion

I have provided you with the various valuation items and explained how the tangible book value per share of C$1.46 excludes the value of KEDM, the real estate services business and the optionality of the real estate business. I believe the core of the investment thesis is that given its track record as an efficient capital allocation and its strong alignment through its 23.5% stake, Kuppy will continue to grow NAV/share.

Finally, I would like to highlight the high rate at which YAK has bought back its own shares over the past few years. Shares outstanding are down 19% since 2016. While many companies tend to overpay for buybacks, the 28% internal ownership ensures that management carefully considers valuation before buying back shares. Their continued buybacks, even at higher prices, means they clearly see value in the real estate sector, KEDM or the merchant banking franchise. The current NCIB has been maxed out, but I expect it to be renewed in 2022.

Risks

Given the small-cap nature of this business, a few more words about risk are in place. The stock is illiquid and it is difficult to build or exit large positions. A third of the business is still invested in Mongolia. Investing in Mongolia is not only expose you to a wide range of risks, historically many of these risks have materialized. Real estate values ​​have almost constantly fallen and the repatriation of capital is never guaranteed. The publicly traded investment portfolio also has limited diversification, and diversification could further decrease if a large private company is acquired.