Mongolia Growth Group Ltd. CEO’s Address to Shareholders

TORONTO, CANADA, January 13, 2015 /FSC/  Mongolia Growth Group Ltd. (YAK: TSXV , MNGGF: USA)

To The Shareholders of Mongolia Growth Group Ltd. (MGG);

As the largest shareholder and newly appointed CEO, the time has come to explain the recent corporate events at MGG and detail our path forward. I feel strongly that the actions taken on December 15^th are the first of many concrete steps that will stabilize our business and put it on a much more sustainable path going forward. 

How We Got Here?

In the summer of 2010, I embarked upon a journey to Mongolia that became the genesis of MGG. While in Mongolia, I became convinced of the long-term growth potential of the country and became determined to create a way for myself and some friends to invest in a country whose rapid economic growth seemed largely inevitable on the back of a mining boom.

MGG was founded on the principal that we could gain leverage to this growth, while offering the four key tenets of any successful investment; liquidity, transparency, strong corporate governance and most importantly, a clear business strategy. As part of my commitment to this venture, I invested over USD $3 million of my own capital in successive financings undertaken by the company, while refusing any cash compensation since inception.

From the very start of this venture, I was explicit that MGG would focus on creating the maximum long-term return for shareholders—while ignoring potential short-term losses. Central to this belief was the notion that investors would be attracted to Mongolia’s rapid growth and naturally seek out the largest public company which offered those four key investment tenets. Given our clear front-runner status, we expected to become the preferred destination for capital by creating the trusted brand for investors wishing to gain exposure to Mongolia. While this would cost money early on, there were many analogs in other emerging markets where the front-runner offered stupendous returns to early investors while continuing to reward subsequent investors.

As we approach the fourth anniversary of this venture’s founding, it has become increasingly obvious that; while we delivered on our mandate of creating one of the most respected companies in Mongolia, economic events outside of our control have made it increasingly unlikely that we will reach our prior goal of hitting the critical mass necessary to support our elevated corporate structure in the near term.

The Current Economic Landscape

Mongolia’s GDP growth rate peaked in 2011 at 17.5%, but has recently declined into the single digits, largely on the back of a greater than 80% decline in Foreign Direct Investment (FDI) during 2014 compared to either 2011 or 2012. There are many causes for this decline in FDI, some self-inflicted while others are beyond anyone’s control. However, the delay in finalizing an agreement regarding underground development at the massive Oyu Tolgoi copper mine has clearly tarnished Mongolia’s image as an investment destination. While I remain confident that this dispute will ultimately be resolved in a manner that is favorable to both Mongolia and Rio Tinto, the timing of this resolution remains unsure. Until then, I do not anticipate a sizable increase in FDI or economic growth rates.

Fortunately, MGG has been largely immune to the effects of the slowing economy—our occupancy has remained stable, while our comparable rents continue to increase in Togrog terms. That said, negative sentiment regarding Mongolia has impacted our ability to raise additional capital accretively, ultimately necessitating change in order to shrink our cost structure to be more in line with our revenues. 

Management & Board Changes

On the management side, we will realize substantial cost savings as I am prepared to once again work without cash compensation. In terms of our board, I think that there will be substantial benefits to having a majority of our independent board members (Nick Cousyn, Jim Dwyer and Byambaa Losolsuren) living in Mongolia. Additionally, Brad Farquhar and Robert Scott will be helpful with rightsizing MGG as they have had recent experience at cost effectively running Canadian public companies.

Our new board and I are committed to a program of fiscal discipline necessary to right-size our cost structure and put the company in a position to once again be the preferred destination for investment capital targeting Mongolia. Simultaneously we will be reducing the risks to the business should this economic acceleration be deferred for a number of years.

Short-Term Goals

Since stepping out of the CEO role earlier this year, I have not been involved in the day-to-day operational aspects of the business. This time away from the daily travail of everyday operations offered an opportunity to step back and reassess MGG and its trajectory against our initial business plan.

As a result, I concluded that a change in strategy was required.  Our current cost structure developed when we first envisaged MGG. At that time, we contemplated successive rounds of financing that would create a substantially larger property portfolio than we hold today. With few prospects for raising additional capital at acceptable terms in the near future, it became clear to me that the cost structure needed to be revamped, with an eye toward retaining our key Mongolian employees.  Inasmuch as we have invested in a solid property portfolio, we have also invested substantially in our Mongolian employees—our other key asset which isn’t spoken about enough.

We are currently engaged in a thorough evaluation of all costs in the business and have found a number of expenses that offer little value to the company going forward. Fortunately, many of these costs can be eliminated quite rapidly. While it is too soon to put a savings target down, I think that shareholders will be pleased at the efficiencies we have been able to find over the past few weeks.

Once these costs have been eliminated, we will begin casting the net further. I believe that there are substantial savings to be had when looking at our professional fees, along with certain public company costs that we have largely taken for granted over the years. I anticipate that our new board members will be invaluable in terms of evaluating how to do more for less.

Clearly, cost cutting will only get us so far. While cutting costs, we are going to be careful not to impact our future growth plans. However, when we begin growing again, it will be with a much leaner cost structure that allows investors to see how added capital creates value for MGG, as opposed to simply being consumed to support an unnecessary cost structure. 

Where do we go from here?

During 2014, we spent just under USD $900,000 to renovate our prized Tuguldur Center. As I write this to you, the property is effectively 100% leased at projected rental rates, despite a difficult economy. I think this speaks to the unique nature of this high-quality retail asset located in the heart of downtown Ulaanbaatar.

Based on our preliminary estimates, we believe that a total expenditure of approximately USD $6 million will add substantially to the leasable space at this facility and generate more annual revenue than the rest of our portfolio produces combined. With this revenue, our company would show substantial positive cash flow.

We have begun initial planning, along with permitting and hope to complete both by early spring 2015. USD $6 million is a sizable number, and we are looking at non-dilutive ways of funding this without taking on undo risk to the company. Strategically, this may entail splitting the project into two more manageable phases of roughly USD $3 million each year.

In addition to Tuguldur, we have two other prime development sites that we would like to advance in the near-term. Our primary goal is to develop our “Peace Tower” land package, located on Peace Avenue, approximately 100 meters from Tuguldur. We have signed non-disclosure agreements with multiple parties who are interested in joint venturing with us on this project. The second project, internally named “Yellow,” would become a retail center, similar to Tuguldur.

While developing property can be lucrative, it also requires substantial capital and entails certain risks. I believe that there are even more interesting opportunities in the fee-based capital-light side of our business. We have been approached by multiple international investors that want to use our in-house capabilities to purchase distressed properties on their behalf. We continue to view this as an excellent use of our company resources.

Conclusion

In summary, I see the recent changes at MGG as being long overdue and necessary to stabilize our business, while still targeting growth. Our negative cash flow has not only chipped away at our balance sheet over the years, it has also discouraged investors from giving us additional capital to grow. The first step is to cut our costs, then re-evaluate and possibly cut more. I remain committed to pushing Tuguldur ahead, and with it, becoming cash flow positive. We are sufficiently capitalized that we can push ahead with Tuguldur without a single dollar of outside capital. Additionally, we have the resources needed to get to a positive cash flow situation, and that is now our focus.

In my May 2011 letter to shareholders, I noted,

“Early in May, our shares traded as high as CDN $6.00. Clearly, I think we are making huge progress at MGG—but isn’t it a bit presumptuous to say that a little under CDN $20 million invested in our company in the past four months is suddenly worth in excess of CDN $150 million in market value? I believe our investments have appreciated since we acquired them—but such increases in value in such a short time are simply impossible.”

At that time, the value of our shares simply seemed “wrong,” and I noted it to shareholders. The value of our shares once again seems “wrong” but at the other extreme. As of the end of the third quarter of 2014, our tangible book value per share was CDN $1.43. While property prices have softened over the past few months, I do not believe that they’ve declined by anything approaching the magnitude of our share price. Unprofitable companies often trade at less than book value—restoring our operations will hopefully help to close this chasm. Profitable companies often trade at a premium to book value—we aim to get there.

I realize that this company has not exactly followed my planned trajectory—partly due to a slow-down in Mongolia and partly due to mistakes along the way. As the largest individual shareholder, I intend to put things right and ensure that MGG is in a position to thrive regardless of the economic situation in Mongolia. We are debt free, rich in assets and finally taking the right steps to push the company forward. I believe that Mongolia is simultaneously making changes to re-start its own economy, and we want to be ready to take advantage of the next wave of opportunity.

Over the next few months, I intend to return to my normal style of regularly informing you of our progress.

Sincerely,

Harris Kupperman

Chairman & CEO of Mongolia Growth Group Ltd.

For further details on the foregoing document, please refer to the Corporation’s filing on SEDAR.

For more information on Mongolia Growth Group Ltd., please see our website: www.MongoliaGrowthGroup.com

Or contact:

Genevieve Walkden GWalkden@mongoliagrowthgroup.com

Mongolia Growth Group Ltd. is a publicly traded and leading property investment and development company in Ulaanbaatar, Mongolia. MGG owns an extensive property portfolio, in diversified segments of the property market, with an emphasis on institutional-grade commercial assets.

MGG undertakes its own property acquisitions, develops brownfield land assets and repositions outdated properties, relying on in-house services for all facets of both the investment portfolio and development side of the business. In addition, MGG acts as a full-service third party provider for institutional clients and tailors transactions covering acquisition-to-suit, build-to-suit, as well as refurbish-to-suit, for property owners and major tenants.

Forward-looking Information Cautionary Statement

Information and statements contained in this Letter to Shareholders that are not historical facts are “forward-looking information” within the meaning of applicable Canadian securities legislation and involve risks and uncertainties.

Forward-looking information is necessarily based upon a number of assumptions that, while considered reasonable by management, are inherently subject to significant business, economic and competitive uncertainties and contingencies. MGG cautions the reader that such forward-looking information involves known and unknown risks, uncertainties and other factors that may cause actual results and developments to differ materially from those expressed or implied by such forward-looking information.

Such risks and uncertainties include, but are not limited to: risks associated with investment in and redevelopment of real property in Mongolia; competition, financing and refinancing risks; risks to the consumer mortgage market; a lack of correlation between disposable income and consumption; risks related to economic conditions; risks related to mining and mining development in Mongolia; risks related to regulation of the real estate in Mongolia; political risk in Mongolia; changes in Mongolian taxation rules; reliance on key personnel; environmental matters; tenant risks; and other risk factors more particularly described in in MGG’s filings with Canadian securities regulators, which filings are available at www.sedar.com.

Additional risks and uncertainties not presently known to MGG or that MGG currently believes to be less significant may also adversely affect MGG. Forward-looking information is designed to help you understand management’s current views of our near and longer term prospects, and it may not be appropriate for other purposes. MGG does not undertake any obligation to update or revise forward-looking information, whether as a result of new information, future events or otherwise, except to the extent legally required.

The TSXV has not reviewed and does not accept responsibility for the adequacy or accuracy of this Letter to Shareholders.

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