BDSEC JSC
Mongolia’s Largest
Broker
Gobi Cashmere (GOV:MSE) - BUY
May 20, 2015
Gobi Cashmere (GOV) - MSE’s Best Company of 2014
Cashmere is the second largest hard currency-earning export of
Mongolia after mining products making the country the second largest
producer of cashmere behind China with about 6,700 tonnes of raw
cashmere per year or 40% of the world market. However, Mongolia is
using only 10% of potential capacity in cashmere industry. Government
of Mongolia has pledged to support non-mining sectors, specifically
cashmere industry, in all ways as Mongolia is seeking to diversify its
economy, now heavily reliant on mining.
Closing price (MNT): 7,615
Rating:
BUY
Target price (MNT):
11,247
Forecast dividend yield: 1.4%
Potential return: 49.1%
Overview
Established year: 1981
Business:
Cashmere
Market Cap: MNT 59.4B (US$ 30.6M)
Gobi’s sales are growing each year to a new record high for the last 6
years. In 2014, Gobi proved it could keep the growth going, with sales
and earnings growing 35% and 48%, respectively, which made Gobi
to be the most profitable MSE-listed company in 2014 with net profit of
MNT 10.5 billion (~US$ 5.6m).
Major Shareholders
Others
16%
Ulemj Ikh LLC
6%
Mongolian Stock Exchange named Gobi as the “Best MSE-listed
Company of 2014” based on measures such as daily turnover, market capitalization, continuous profitable business, transparency and
corporate governance.
Hide Inter LLC
34%
Tavan Bogd
Trade LLC
16%
Gobi Cashmere has 48 shops, including 10 new openings in 2014 and
2 new openings in 2015 so far, over 20 cities in 12 different countries.
Since exports represent 40% of Gobi’s sales, the declining currency has
had a positive impact on their results, while about half of Gobi’s domestic sales are foreign tourist oriented. We expect their exports to increase
more than 20% this year.
FCI LLC
28%
Source: Central Depositary, BDSec
18,000
10,000
17,000
9,000
8,000
16,000
7,000
15,000
6,000
14,000
5,000
13,000
4,000
12,000
3,000
GOV:MSE
Source: MSE, BDSec
Close: 7,615
52wk Range: 6,900/9,500
Avg Vol (1y):
232
EPS (ttm):
1,345
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Mongolia’s Largest
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GOV:MSE
MSE Top 20 index
GOV stock chart, 2-year
MSE Top 20
With the recently signed Economic Partnership Agreement (EPA) with
Japan, we should soon start seeing increase in cashmere export to
Japan.
While Mongolian cashmere is competing with Chinese cashmere on
exports, China itself is a huge opportunity for Mongolian cashmere
for its proximity and growing domestic market. The Company started
opening franchise shops in China’s cities beginning last year.
At MNT 7,615, the Company is just trading at a multiple of 5.7 times
earnings and the Company looks capable of keeping its earnings
growth at 20-30 percent for years to come. The Company’s market value as at MNT 59.4 billion or US$ 30.6 million. We believe the stock has
been undervalued for a long time. For a mature company like Gobi with
annual sales of US$ 33.9M, earnings of US$ 5.4M, market share of
40% in Mongolia, franchise shops in more than 20 cities in 12 countries
around the world, continuous +20% annual growth rate, we think it is
pretty low. With capacity utilization of 67%, the Company has a space to
grow. The company has been paying annual dividends (~10% payout)
to shareholders every year since 2010. We believe Gobi Cashmere is
one of the best picks out there on MSE.
BDSEC JSC
Mongolia’s Largest
Broker
Gobi Cashmere (GOV:MSE) - BUY
May 20, 2015
Cashmere as largest cash-earning industry outside mining
Cashmere is the second largest hard currency-earning export of Mongolia after
mining products making the country the second largest producer of cashmere
behind China with about 6,700 tonnes of raw cashmere per year or 40% of the
world market.
Major Mongolian export products, million US$
Copper concentrate
849
Oil
Gold
Cashmere
Zinc
Fluorspar
300,000
2,574
Coking coal
Iron ore
Mongolian Cashmere Export, million US$
250,000
635
200,000
446
150,000
405
100,000
286
50,000
113
0
2004
72
Source: NSO, BDSec
Mongolia is using only 10%
of potential capacity in
cashmere industry
`05
`06
`07
`08
`09
`10
`11
`12
`13
`14
Source: NSO, BDSec
But out of this 6,700 tonnes of cashmere, only over 10 percent goes into further
processes and becomes end-products such as coats, jackets, sweaters, pants,
hats, scarves etc, and the rest are exported after first process. Mongolia is
selling only about 1.2 million units of cashmere knitwear (40% goes to
export) per year, while world’s largest cashmere producer Erdos Group in Inner
Mongolia alone has production capacity of over 10 million units. Gobi
Cashmere has production capacity of over 700 thousand units and it made about 470
thousand units last year, which takes up 40 percent of market share in
Mongolia. Number of its shoppers are growing as they offer a wide range of
styles, quality, designs and prices.
After
14-17
processing
stages, 2 sweaters are made
out of 1 kg of raw cashmere
Source: Gobi Cashmere
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Mongolia’s Largest
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Gobi Cashmere (GOV:MSE) - BUY
May 20, 2015
Fastest growing MSE-listed company
Gobi’s sales growing to new
record highs for last 6 years
Gobi’s sales are growing each year to a new record high for the last 6 years.
In 2014, Gobi proved it could keep the growth going, with sales and earnings
growing 35% and 48%, respectively, which made Gobi to be the most profitable
MSE-listed company in 2014 with net profit of MNT 10.5 billion (~US$ 5.6m).
Management sees the outlook of the year 2015 as very promising. They have
outlined aggressive plans for the year to increase sales and earnings by 18 and
43 percent, respectively.
Top 10 Most Profitable MSE-listed Companies of 2014, billion MNT
Gobi Cashmere
10.5
Tavantolgoi
Management sees 43%
earnings growth in 2015
3.5
Bayangol Hotel
2.8
Suu
2.8
Material Impex
2.8
Talkh Chikher
2.3
Power Plant #3
2.3
Darkhan Nekhii
1.9
Gutal
1.5
Tekhnik Import
1.4
Source: MSE, BDSec
Mongolian Stock Exchange named Gobi as the “Best MSE-listed Company
of 2014” based on measures such as daily turnover, market capitalization,
continuous profitable business, transparency and corporate governance.
Japanese Hide Inter LLC is the largest shareholder, owning 34% of the
Company whereas Tavan Bogd Trade LLC, one of the largest conglomerate in
the country, owns 16% of Gobi. Free float is about 16% or 1.3 million shares.
Mr D.Khurelbaatar, who is Deputy CEO at Trade and Development Bank, is the
Board Chairman of Gobi. Mr Hideo Sawada serves on the Board of Directors
of Gobi. Mr Sawada is the President and CEO of Sawada Holdings Co., Ltd.,
largest shareholder of Khan Bank, one of 3 biggest banks in Mongolia. He is
known as the founder and Chairman of H.I.S. Co. Ltd.
Contact us to get our Gobi
initiation published in 2012
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Mr Ts.Baatarsaikhan has been the Chief Executive Officer of Gobi since
2008. Mr Baatarsaikhan is the President of Tavan Bogd Group and founder of
Tavan Bogd Trade Co., Ltd. He was named CEO of the Year by Bloomberg TV
Mongolia in 2013.
3
BDSEC JSC
Mongolia’s Largest
Broker
Gobi Cashmere (GOV:MSE) - BUY
May 20, 2015
Huge government support
GoM is committed to develop
cashmere industry
Gobi holds plenty of appeal. First of all, Gobi Cashmere is Mongolia’s best
known brand. GoM has pledged to support non-mining sectors in all ways as
Mongolia is seeking to diversify its economy, now heavily reliant on mining.
GoM is financing 888 local projects in different fields with its Chinggis bond,
but GoM is mostly concentrating on cashmere, leather and food sector as
they are major cash-earning businesses in Mongolia and they have potential
both domestically and internationally. On April 20, GoM announced MNT 100
billion (~US$ 51M) loan for cashmere producers to support them with working
capital, proving GoM’s commitment to the industry. To process all available raw
cashmere domestically, local companies need some MNT 300 billion (~US$
154M) of working capital during the season. According to the Ministry of
Industry, if the country refines all of its cashmere before exporting it, cashmere
export revenue can rise to US$ 1 billion from US$ 286 million.
Mongolia is now using only about 10 percent of raw cashmere to make end
product. According to Mongolian Wool and Cashmere Association, if working
capital issue is resolved, Mongolian companies will be able to use and refine
50 percent of raw materials here to make end product.
Raw cashmere, the single
largest cost component in the
industry went down 50% this
year
Raw cashmere price, which was soaring above MNT 80,000 per kg, decreased
to MNT 40,000 this year. The lower price hurts herder’s income, but overall it is
good for cashmere industry growth as a whole.
Their main export target markets are France, Germany and Japan. Gobi Cashmere has 48 shops, including 10 new openings in 2014 and 2 new openings
in 2015 so far, over 20 cities in 12 different countries. Since exports represent
40% of Gobi’s sales, the declining currency has had a positive impact on their
results. We expect their exports to increase more than 20% this year. Plus,
tourists in Mongolia usually pay for purchases in dollars or euros, bringing more
foreign currency. We have been seeing a lot of shoppers from Russia in Ulaanbaatar as the two countries made an agreement on visa-free travel last year.
Source: gogo.mn
It is tax free to export cashmere products to European Union and
Mongolia has just made an Economic Partnership Agreement (EPA) with Japan
in February. It is the first such agreement for Mongolia. Japan charges Mongolian and Chinese cashmere exports at same level of 10.9%. Eliminating this tax
gives Mongolian cashmere an opportunity to compete with Chinese products.
Minister of Industry D.Erdenebat has invited cashmere producers to actively
participate in state and private sector meeting between Mongolia and Japan
that will take place in June.
Company is opening franchise shops in China, largest
competitor on cashmere industry
While Mongolian cashmere is competing with Chinese cashmere on exports,
China itself is a huge opportunity for Mongolian cashmere for its proximity and
growing domestic market. Last year Gobi Cashmere opened its franchise shops
in Erlian and Hohhot in Inner Mongolia, China and in January 2015 it opened
another one in Xilinhot as well. The company is now seeking opportunities to
open stores in Beijing and Shanghai. Management also sees online shopping
as one way to tap into Chinese market.
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Mongolia’s Largest
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Gobi Capital Expenditure (billion MNT)
7.4
5.4
3.7
3.5
2.7
2.5
2.0
Gobi Cashmere (GOV:MSE) - BUY
May 20, 2015
Value
Gobi continues to upgrade their factory to increase productivity and to
decrease fixed costs since the current management took over remaining stateowned shares in 2007. For the past 8 years, total of MNT 27.2 billion (~US$14
million) investments were made into the Company. In 2014, Gobi successfully
upgraded its textile factory, doubling its textile capacity to 300K meters of textile
per annum.
Cash flow projection
0.2
2007
`08
`09
`10
`11
`12
`13
`14
2014
`15F
`16F
`17F
`18F
Domestic Sales
40,777.2
49,502.2
54,933.6
61,464.8
68,084.8
Export Sales
25,829.8
31,648.9
44,945.7
61,464.8
83,214.8
COGS
44,247.1
52,524.2
62,310.7
73,920.7
87,693.9
6,075.6
6,918.0
8,725.2
10,799.4
14,416.0
EBITDA
16,859.0
20,569.4
24,828.2
30,178.7
35,651.7
Earnings before tax
13,377.3
15,967.7
19,652.8
24,188.3
29,770.5
Tax (10% and 25%)
2,885.5
3,541.9
4,463.2
5,597.1
6,992.6
10,491.8
12,425.8
15,189.6
18,591.2
22,777.9
134
159
195
238
292
9,749.0
9,461.9
14,015.7
4,731.0
20,722.4
(million MNT)
Source: Gobi JSC, BDSec
Operating Cost
Net profit after tax
Dividend (MNT)
Net cash flow
NPV @25% discount
87,740,836.9
Shares outstanding
7,801,125
Share price per share (MNT)
11,247.2
Share price per share (US$)
5.8
Source: BDSec estimate
We believe Gobi has been
undervalued for a long time
At MNT 7,615, the Company is just trading at a multiple of 5.7 times earnings
and the Company looks capable of keeping its earnings growth at 20-30 percent for years to come. The Company’s market value as at MNT 59.4 billion or
US$ 30.6 million. We believe the stock has been undervalued for a long time.
For a mature company like Gobi with annual sales of US$ 33.9M, earnings of
US$ 5.4M, market share of 40% in Mongolia, franchise shops in more than 20
cities in 12 countries around the world, continuous +20% annual growth rate,
we think it is pretty low. With capacity utilization of 67%, the Company has a
space to grow. The company has been paying annual dividends (~10% payout)
to shareholders every year since 2010. We believe Gobi Cashmere is one of
the best picks out there on MSE.
PE Comparison of “MSE Top 20” Companies
Company
Market Cap
(bn MNT)
Market Price
(MNT)
P/E
ratio
Company
Market Cap
(bn MNT)
Market Price
(MNT)
P/E
ratio
6.5
80
276.8
1
Gobi Cashmere (GOV)
59.4
7,615
5.7
11
Genco Tour Bureau (JTB)
2
Material Impex (MIE)
20.8
15,210
7.4
12
State Department Store (UID)
18.4
500
651.8
3
Bayangol Hotel (BNG)
22.0
52,000
7.7
13
Remicon (RMC)
5.7
73
(4.3)
4
Talkh Chikher (TCK)
18.4
18,000
7.9
14
Baganuur (BAN)
42.5
2,025
(6.7)
5
Darkhan Nekhii (NEH)
18.8
17,000
10.1
15
Shivee Ovoo (SHV)
47.0
3,500
(8.2)
6
Hermes (HRM)
10.2
130
12.5
16
Khukh Gan (HGN)
7.3
72
(8.8)
7
Makh Impex (MMX)
11.4
3,000
32.3
17
Sharyn Gol (SHG)
39.7
3,880
(12.8)
8
Telecom Mongolia (MCH)
23.5
907
44.9
18
APU (APU)
253.1
3,407
(17.9)
9
Ulaanbaatar BUK (BUK)
39.5
35,000
52.9
19
MDR (MDR)
6.8
498
(42.9)
189.6
3,600
53.8
20
BDSec (BDS)
28.9
1,700
(59.6)
10
Tavantolgoi (TTL)
BDSec JSC
Mongolia’s Largest
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Source: BDSec estimate
5
BDSEC JSC
Mongolia’s Largest
Broker
Gobi Cashmere (GOV:MSE) - BUY
May 20, 2015
Gobi Cashmere (cont’d)
Gobi Cashmere Financials
Balance Sheet (`000 MNT)
Cash and cash equivalents
2010
`11
`12
`13
`14
746,737.2
1,528,603.3
6,601,483.5
6,487,287.0
16,236,253.3
Total Current Assets
17,988,080.9
23,932,759.9
39,449,226.60
49,431,879.50
66,149,457.30
Fixed Assets
34,199,131.5
43,724,177.8
27,860,786.0
31,057,266.8
33,111,997.3
Total non-current assets
15,673,690.8
28,411,538.0
28,255,726.0
31,795,191.0
33,828,547.9
Total Assets
33,661,771.7
52,344,297.9
67,704,952.60
81,227,070.50
99,978,005.2
Short-term debt
5,157,799.5
3,329,651.4
4,937,474.5
5,242,952.6
18,918,887.3
Long-term debt
4,055,799.6
16,547,183.4
25,829,418.8
32,918,322.0
28,515,659.2
Total Debt
9,213,599.1
19,876,834.8
30,766,893.30
38,161,274.60
47,434,546.50
24,448,172.6
32,467,463.1
36,938,059.3
43,065,795.9
52,543,458.7
Current Ratio
3.49
7.19
7.99
9.43
3.50
Debt Ratio
0.27
0.38
0.45
0.47
0.47
Debt to Equity
0.38
0.61
0.83
0.89
0.90
Price to Book
1.30
0.77
0.52
0.53
0.58
Income Statement (`000 MNT)
2010
`11
`12
`13
`14
Sales revenue
28,894,520.3
35,364,680.2
40,826,785.90
48,758,084.20
65,934,570.40
Cost of sales
21,949,459.0
26,518,322.8
29,709,821.00
32,513,868.20
44,274,738.70
Operational profit
6,945,061.3
8,846,357.4
11,116,964.9
16,244,216.0
21,659,831.7
General and Administrative expense
4,019,295.6
4,943,672.3
5,643,730.50
6,674,635.70
8,895,004.70
Net Profit after tax
3,360,901.9
1,704,476.3
5,250,708.70
7,102,877.20
10,491,809.20
Shareholders' Equity
Earnings per share (MNT)
431
218
673
910
1,345
Dividend per share (MNT)
0
100
125
130
140
NA
46%
19%
14%
10%
Gross Profit Margin
24%
25%
27%
33%
33%
Net Profit Margin
12%
5%
13%
15%
16%
Return on Assets
10%
3%
8%
9%
10%
Return on Equity
14%
5%
14%
16%
20%
Price to Earnings
13.0
23.6
6.7
6.1
5.7
Cash flow statement (`000 MNT)
2010
`11
`12
`13
`14
3,013,240.0
1,099,128.2
-2,856,468.6
113,737.5
-4,654,907.9
(2,821,717.9)
(2,658,357.4)
-6,145,484.2
-741,282.0
-2,914,621.2
3,816.9
2,341,095.2
14,128,857.2
513,348.0
17,318,495.4
Net cash flow
195,339.0
781,866.0
5,126,904.4
(114,196.5)
9,748,966.3
Cash and cash equivalents at 1 January
551,398.3
746,737.2
1,528,603.2
6,601,483.5
6,487,287.0
Cash and cash equivalents at 31 December
746,737.3
1,528,603.2
6,655,507.6
6,487,287.0
16,236,253.3
Dividend payout ratio
Net cash flows from operating activities
Net cash flows used in investing activities
Net cash flow from financing activities
Source: Gobi, BDSec estimate
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Mongolia’s Largest
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BDSEC JSC
Mongolia’s Largest
Broker
Gobi Cashmere (GOV:MSE) - BUY
May 20, 2015
Institutional Sales & Research Department
phone/fax: 976-11323411
mail: [email protected]
Nick Cousyn
Chief Operating Officer
email: [email protected]
Munkhtulga Ganbold
Head of Institutional Sales
Email: [email protected]
O.Odbayar
Analyst
email: [email protected]
J.Sainbayar
Dealer
email: [email protected]
BDSec Headquarter
Zaluuchuud Avenue 27-1
8th Khoroo, Sukhbaatar District
Ulaanbaatar, Mongolia
Phone/Fax: 976-11313108
Website: www.bdsec.mn
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