BDS ec: Investment banking

The Company

BDS ec was established in 1991 and is both the oldest and largest brokerage and investment bank in Mongolia. BDS ec is the only publicly traded financial company on the Mongolian Stock Exchange (MSE) and trades under the symbol of MO:BDS. BDS ec’s market share of traded volume on the MSE over the past three years is 69%, and the company has underwritten 75% of primary equity offerings over the past five years. BDS ec’s market capitalisation is $17m, and it trades at 25 times its 2012 earnings and 3.7 times its book value. Trading volumes on the MSE have declined significantly since the implementation of the London Stock Exchange (LSE) MillenniumIT system in mid-2012, and many brokers have closed operations, decreasing competitive pressures. In fact, it is quite possible that the number of Mongolian brokers capable of serving the needs of international investors could be reduced to five or less. All Mongolian financial institutions with US clients must soon be compliant with the Foreign Account Tax Compliance Act, which requires scale and capabilities beyond the vast majorities of Mongolian brokers. BDS ec maintains two strategic partnerships: one with Auerbach Grayson in the US and the other with CLSA covering Asia, giving BDS ec a large institutional client base in the country. Many investors come to Mongolia looking for a local partner to help navigate the local capital or private equity markets. Given BDS ec’s size and financial stability, it is very likely more strategic partnerships and joint ventures will present themselves.

Development Strategy

In late 2013 Parliament passed a New Securities Law which corrects many of the problems created by the LSE’s MillenniumIT system. The new legislation allows for international custodians to enter the local market, which is a necessary precursor to mutual fund money being invested on the MSE. Mongolia is currently going about the process of being added to both the FTSE and MSCI Frontier indices, which if successful, would make Mongolia part of global frontier manager’s benchmarks. A close look at the MSE reveals several highquality companies, trading at single-digit price-toearnings ratios, while growing revenues and earnings at low-mid double-digit rates. Insider ownership on the MSE is extremely high at over 55% and the government of Mongolia still owns around 20% of the MSE’s market capitalisation. This leaves only some 25% (around $230m) as a free float for investors to buy, which may increase stock prices significantly when large pools of capital decide to allocate funds to MSE-listed stocks. The impact of mutual fund money finally able to trade on the MSE would have extremely positive implications for BDS ec’s overall operation. After the original Oyu Tolgoi Investment Agreement was signed in 2009, stocks went on to increase 600% in a little over one year.

Given the MSE’s small size and free float, a similar if not greater increase in stock prices could follow the arrival of mutual funds in the country. A number of MSE-listed companies need to raise capital, both to maintain their rapid growth rates and pay down high interest rate debt.

Once investors start returning to Mongolia, the country will use the MSE to access these investors through public equity and debt offerings, generating high-margin investment banking fee income.

BDS ec has a competitive advantage to dominate this business when activity picks up. However, conversations about any Mongolian company cannot be complete without addressing the macroeconomic outlook of the country. The country is set to resolve its long-standing dispute with Oyu Tolgoi by September 2014. But all the macroeconomic figures are worsening, and the inflow of foreign direct investment is recovering slowly. In this environment, the business of BDS ec may deteriorate in a short term similarly to the share price. However, the company is worth watching as long-term investors’ sentiment for BDS ec will reflect investors’ interest on the MSE.