Mongolia: Land of opportunities if you know where to navigate

An account of Mr. Johnson Koh, an HKUST MBA Candidate who took part in the M.A.D. summer internship program (2011).

My three-week internship has been a real eye-opener. After speaking to I-bankers, land-owners, company directors, Mongolian youngsters, expats, my MBA classmates and even the lady selling fruits on the streets, I am even more convinced that this country will prosper in the mid-to-long term.

I could already sense the hype just sitting on the plane on-route to Ulaanbaatar. Beside me were two executives from Siemens Healthcare who were going to meet with hospitals to explore business opportunities and to hopefully open a main office in the City. In front of me were two investment bankers, and they were talking through the finer details of the deals that they were hoping to secure.

The airport is surrounded by grasslands loosely populated by Gers and a few cattles, and the airport is similar to those in 3^rd-tier Chinese cities, small with not much facilities. However I came to realize that this is what a frontier market is all about, the opportunity to create and expand, and this is exactly what the Mongolian government is doing by announcing plans to build a new international airport.  Mongolian government is also pathing the way for foreigners to enter the country by allowing foreigners to obtain a visa upon arrival. Clearing the customs itself was an easy process though as the officer did not ask stupid questions and there was no customs check.

The road to Ulaanbaatar was not in good condition, lots of potholes and unsealed sections.  Neither are the huge water pipes, overheard cables and light poles. The taxi took me pass two coal-fired thermal power plants, some old warehouses, and a few billboards. The city itself was fairly clean. The buildings are low-rise, and of a Russian Era. The road in the CBD area is in pretty good condition. There are construction sites around the city, workers building new roads, laying pavements and installing pipes and re-painting the older buildings. I can sense the transformation taking place.

However traffic is awful and air quality is not bad. There are not much cars early in the mornings (that’s when I feel safe enough to run outdoors), but traffic can get very bad once business hours starts. Crossing the road can be a nightmare though, because cars don’t obey traffic rules. I’m lucky that there is an underpass leading up to my office so that I don’t have to gamble with my life everyday.

I was hired by a real estate agency to help set-up a private equity fund to invest in Mongolian properties. My office and accommodation is situated near the state departmental store, the epic center of the city, surrounded by restaurants and retail outlets. 6 of my classmates from the MBA program are also in the city. Their office is at the heart of the CBD, near the monumental Suubaatar Square. I was taken to a meeting at a soon-to-be completed office building with a fund manager searching for investment properties. I understand there is an ample supply of commercial space but that demand is starting to pick up. Residential properties are more popular and there are opportunities to get a double-digit yield or make a quick profit by flipping properties. However conducting due diligence on the properties is an issue, but can be alleviating by hiring the services of M.A.D. Investment Solutions, the real estate agency whom I’m working for. They will guide or conduct the buying process on your behalf, thereby giving an investor the peace of mind. Another advantage M.A.D. has over the other agencies is a strong research team. They are about to publish a comprehensive report of the Mongolian property sector, which provides an excellent overview of the trends of the property market. The Mongolian property market is still in pioneer stage, so I am optimistic that market value will only appreciate as urbanization increases and economies start picking up. A flip side is that foreigners cannot own land legally but they can invest in development projects, with the help of a local partner.

What struck me was the lack of international hotel chains in Ulaanbaatar. I counted about 3 major hotels around the City, including the Ramada Hotel, which is set to open in August 2011.  Later I understand that Shangri-La and Hilton will open in 2012. I believe this city needs more short-term accommodation, to cater to more people attending seminars and conferences.

I met a young Mongolian gentlemen during one of my runs who confirmed that investor interests is increasing. He has met many private equity firms interested in investing in core industries outside of mining. The story of Mongolia so far has been the large copper and coal deposits, but there are also opportunities outside of the mining industry. There are lots of upsides if one invests in the supply chain to the mining industry such as housing for workers, fresh meat and vegetables, entertainment, medical services and just about anything else one can think of to these mining companies. The only problem is that I have to be in Mongolia and get yourself known in this circle of people so you can be in a position to hear about these issues and then offer solutions, which can be turned into businesses. For example, my running mate has told me that PE firms would feel more confident if companies could offer them a detailed business plan about how the funds would be utilized. Perhaps my MBA classmates would be interested to offer this service. But they have to pick-up the language quickly or find an excellent translator.

Also, opportunities for investors will present themselves across asset classes and sectors such as infrastructure, real estate, consulting and banking as particularly attractive. My classmates have been meeting investors on a daily basis interested in investing in assets outside of the mining industry. Companies would appreciate this hype as there are limited access to long-term bank loans. High interest rates is also a major factor.

I met with a couple of brokerage firms and believe there are lots of upside potential in the stock market. I met the managing director of Rescap, who are my brokers and also had a chance to speak to his research team. I was concerned about the lack of information and liquidity on the MSE, even those in the top-20, whose financial statements are mostly in Mongolian. The MD cited me an example of a family in NY who successfully invested in the Iraqi stock exchange, which launched an electronic trading system with Nasdaq aimed at increasing the visibility and credibility towards foreign investors. He mentioned that LSE’s modernization of the MSE would also increase visibility, and attract liquidity in due course. He predicts that over market will be driven by capital inflow over the short-term and suggested I give myself a two year time-line.

In a country where most of the population resides in Ulaanbaator, where income and population are increasing at an unprecedented rate, and where is a lack of basic professional services,  one could earn a good living here if he/she can navigate the language. One would also have to know the right people to invest successfully in this market. The biggest benefit as an expat is that he/she can plug in the movers and shakers, people who can get deals and businesses done quickly and who have the inside information. As Chris, senior partner of M.A.D. Investment Solutions would say, “there is a lack of everything here, from engineers, electricians, plumbers, carpenters, good quality furniture, even nespresso capsules”. So I suppose if you show up and are smart, then you will move up the food-chain fairly quickly.