BDSec: Hidden value of Mongolian stock market
March 22 (BDSec) After we sent out some news about a company which has just won the government tender to build a 1000km highway, one of our clients got back asking how come the company's stock price goes down when there is actually positive news. This has lately been the case in the Mongolia stock market where what's actually happening with the companies or the economy doesn't always translate into the market or the share prices unless it's especially meaningful.
(chart)
The chart above is a good example of how meaningful news announcements have affected the market throughout last year. While those not mentioned, such as the ongoing negotiations between the Government of Mongolia (GOM) and Rio Tinto, the owner of the biggest mining project in the country, Oyu Tolgoi (OT), as well as the upcoming presidential election which is in this June are starting to impact stock prices. But from a more positive perspective, the recent loan to OT sponsored by the EBRD and IFC could potentially raise up to US$ 4B worth of proceeds, a huge number. There is also the general expectation that the political and legislative environment would be less unpredictable following the election.
However, this might lead some to think that there is too much influence from political issues which, in reality are fairly irrelevant to local companies and profits. These companies take advantage of local economic growth and are largely insulated from political risk. As such, this has also led us to think it might not make sense to judge the local market performance as it appears on Bloomberg or elsewhere and to look at questions like how did the market actually perform since the beginning of last year? What factors have been affecting the fact that it had declined nearly 30% and where we could see a potential recovery from a bit different angle?
MSE-listed companies announce strong results despite struggling market
When you take a closer look at the components of MSE Top 20 index you will see many of them have performed exceptionally well apart from a few coal stocks, which encountered unique challenges in 2012. As most people are aware low coking coal prices globally hurt not only the locally listed stocks but also larger companies likeMongolia Mining Corporation which is listed in Hong Kong Stock Exchange. The main component of the coal stocks in the Index isTavan Tolgoi JSC (TTL:MO or TTL) which has nearly 30% weighting of the whole index, skewing overall performance.
TTL is one of many local coal exporters hit heavily by disappointing coking coal industry performance and saw more than an 80% of decline in its 2012 net profits. This explains the large selloff in the overall index, with its 30% of its weighting. TTL's poor performance offset most of the gains brought by the other components no matter how big or small they were. Therefore, we took TTL along with its fellow coal producers out of the index to see how the market would have performed without the heavy weighting of large local coal companies.
(chart)
As you can see from the previous chart the non-mining companies are doing fairly well even if the mining sector contributes hugely to the economy. These non-mining companies include beverage, bread, meat and dairy producers to clothing and construction material manufacturing, telecommunication operators to plumbing and logistics services providers. These companies are seeing strong growth, along with ever increasing GDP per capita and business opportunities. Despite their solid growth over the recent 5 to 7 years, the stock market as a whole has always been overly influenced by local mining stocks, most of which even having no relation to the international markets, such as thermal coal producers. They are experiencing a similar rate of growth as non-mining companies, due to the increasing energy demand in the local market.
We believe all these factors create a market that is becoming more and more undervalued, which once it can get passed the current struggles it's facing, could begin a bull market that could last for decades. Investors should also bear in mind how close we are to see OT starting production and the government has finally started investing into infrastructure, which has a huge importance to unlock the real economic growth.
In order to support my points I have picked 10 names randomly out of the best performing 30 companies listed on the MSE to see how they have performed in 2012 in terms of financially, I ended up with some interesting numbers. First and foremost, their average valuation based on PE ratio has come down by more than 25% even if their share prices went up around 30% on average(evidence that the non-coal stocks have beaten the market by far). This is actually a result of an average 32% increase in net profits after tax of the companies picked. As you can see, several companies had an outstanding year (**all financial numbers in million USD except share prices).
(table)
Coal price pulls the trigger for initial recovery
Given the influence TTL has on the whole market, the first catalyst to look for in relation to a potential recovery would be coking coal prices in China. As mentioned before the coking coal price has underperformed in 2012 along with the thermal coal price due to a weak demand on steel products globally. However, we have noticed a strong recovery in the thermal coal price which would certainly affect the coking coal price as the Chinese economy gets better in the 2nd half of 2013. Whereas, the impressive performance of the copper price in recent months signals commodities prices are gaining strength and may rally in 2013, which is music to ears of the Mongolian economy.
(chart)
In conclusion, the Asian markets including Japan, Australia and potentially China seem to be getting better and better since the start of this year and it should help investors gain confidence and look for more opportunities in places like Mongolia. Especially if we see the rally in commodities prices that we anticipate.
In the meantime, we strongly believe the political noise will just disappear or start to draw less attention because it's too risky to have a negative policy towards foreign investment much longer. Last week the GOM decided to take non-government owned companies out of the strategic foreign investment law and a few weeks prior to that, the president spoke against submitting the draft foreign investment law to the parliament in favor of creating practices before coming up with regulations.
After all, we think the commodities prices will prove more decisive for the local stock market to recover rather than the consequences of the ongoing talks on OT, because the mine will surely start and begin to contribute to the economy. Once the market starts recovering there is every chance for it to end up as a decades lasting bull market as already mentioned before.
(chart)
The chart above is a good example of how meaningful news announcements have affected the market throughout last year. While those not mentioned, such as the ongoing negotiations between the Government of Mongolia (GOM) and Rio Tinto, the owner of the biggest mining project in the country, Oyu Tolgoi (OT), as well as the upcoming presidential election which is in this June are starting to impact stock prices. But from a more positive perspective, the recent loan to OT sponsored by the EBRD and IFC could potentially raise up to US$ 4B worth of proceeds, a huge number. There is also the general expectation that the political and legislative environment would be less unpredictable following the election.
However, this might lead some to think that there is too much influence from political issues which, in reality are fairly irrelevant to local companies and profits. These companies take advantage of local economic growth and are largely insulated from political risk. As such, this has also led us to think it might not make sense to judge the local market performance as it appears on Bloomberg or elsewhere and to look at questions like how did the market actually perform since the beginning of last year? What factors have been affecting the fact that it had declined nearly 30% and where we could see a potential recovery from a bit different angle?
MSE-listed companies announce strong results despite struggling market
When you take a closer look at the components of MSE Top 20 index you will see many of them have performed exceptionally well apart from a few coal stocks, which encountered unique challenges in 2012. As most people are aware low coking coal prices globally hurt not only the locally listed stocks but also larger companies likeMongolia Mining Corporation which is listed in Hong Kong Stock Exchange. The main component of the coal stocks in the Index isTavan Tolgoi JSC (TTL:MO or TTL) which has nearly 30% weighting of the whole index, skewing overall performance.
TTL is one of many local coal exporters hit heavily by disappointing coking coal industry performance and saw more than an 80% of decline in its 2012 net profits. This explains the large selloff in the overall index, with its 30% of its weighting. TTL's poor performance offset most of the gains brought by the other components no matter how big or small they were. Therefore, we took TTL along with its fellow coal producers out of the index to see how the market would have performed without the heavy weighting of large local coal companies.
(chart)
As you can see from the previous chart the non-mining companies are doing fairly well even if the mining sector contributes hugely to the economy. These non-mining companies include beverage, bread, meat and dairy producers to clothing and construction material manufacturing, telecommunication operators to plumbing and logistics services providers. These companies are seeing strong growth, along with ever increasing GDP per capita and business opportunities. Despite their solid growth over the recent 5 to 7 years, the stock market as a whole has always been overly influenced by local mining stocks, most of which even having no relation to the international markets, such as thermal coal producers. They are experiencing a similar rate of growth as non-mining companies, due to the increasing energy demand in the local market.
We believe all these factors create a market that is becoming more and more undervalued, which once it can get passed the current struggles it's facing, could begin a bull market that could last for decades. Investors should also bear in mind how close we are to see OT starting production and the government has finally started investing into infrastructure, which has a huge importance to unlock the real economic growth.
In order to support my points I have picked 10 names randomly out of the best performing 30 companies listed on the MSE to see how they have performed in 2012 in terms of financially, I ended up with some interesting numbers. First and foremost, their average valuation based on PE ratio has come down by more than 25% even if their share prices went up around 30% on average(evidence that the non-coal stocks have beaten the market by far). This is actually a result of an average 32% increase in net profits after tax of the companies picked. As you can see, several companies had an outstanding year (**all financial numbers in million USD except share prices).
(table)
Coal price pulls the trigger for initial recovery
Given the influence TTL has on the whole market, the first catalyst to look for in relation to a potential recovery would be coking coal prices in China. As mentioned before the coking coal price has underperformed in 2012 along with the thermal coal price due to a weak demand on steel products globally. However, we have noticed a strong recovery in the thermal coal price which would certainly affect the coking coal price as the Chinese economy gets better in the 2nd half of 2013. Whereas, the impressive performance of the copper price in recent months signals commodities prices are gaining strength and may rally in 2013, which is music to ears of the Mongolian economy.
(chart)
In conclusion, the Asian markets including Japan, Australia and potentially China seem to be getting better and better since the start of this year and it should help investors gain confidence and look for more opportunities in places like Mongolia. Especially if we see the rally in commodities prices that we anticipate.
In the meantime, we strongly believe the political noise will just disappear or start to draw less attention because it's too risky to have a negative policy towards foreign investment much longer. Last week the GOM decided to take non-government owned companies out of the strategic foreign investment law and a few weeks prior to that, the president spoke against submitting the draft foreign investment law to the parliament in favor of creating practices before coming up with regulations.
After all, we think the commodities prices will prove more decisive for the local stock market to recover rather than the consequences of the ongoing talks on OT, because the mine will surely start and begin to contribute to the economy. Once the market starts recovering there is every chance for it to end up as a decades lasting bull market as already mentioned before.
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