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                                           Monday, August 25, 2014
Executive Summary      

BDSec (“MSE: BDS”) has been established in 1991 as a part of the Mongolian Stock Exchange ("MSE") in Tuv aimag province. Their operation is to provide brokerage, dealing, underwriting, and investment advisory services and the original name was Bayan Dukhum Securities. Now they have offices in Orkhon, Darkhan-Uul, and Darkhan aimag provinces with headquarters in Ulaanbaatar.
 
BDSec is Mongolian first independent underwriter firm and became the largest dealer of the government bonds. Furthermore, they have high market share in the equity market , and well known to the public.
 
The company turned into "Joint Stock Company" and got listed on MSE in 2005. BDSec employs over 35 professionals and has 9 departments. In 2013, they have accommodated 26.8% of MSE’s total trade and their latest underwriting was IPO of Merex (“MRX”).

Ownership

According to the information of Mongolian Securities Clearing House and Central Depository (SCHCD), 67.41% ownership of the company kept with 4 block shareholders, and remaining 6.19% or 32,59 are held by 413 small shareholders.
 
  • Alexandr Zwahr – 28.0% or 3,080,500 shares
  • Dayanbilguun Danzan  â€“ 24.6% (2,704,251)
  • to Cayman Islands based Firebird Global Master Fund, Ltd – 9.6% (1,054,301 shares)
  • Firebird Master Fund Holdings – 5.2% or 7,415,087 shares

Financial Review

At the end of the 2013, “BDSec's revenue reached MNT 2.57 billion, which was a 56.44% decrease from previous year. As well as the net profit has decreased 80.53% to MNT 0.29 billion. MSE’s annual trading volume and value has decreased enormously during this period (approx. 85%) and it certainly affected the financial performance of the company.
This year, the trading volume and value increasing gradually and BDSec is expecting to earn 7.96 billion tugrik’s in revenue. 

Business Development

Their latest major work was issuing the Initial Public Offering of Merex, the concrete mix producing company. They have successfully raised 2.6 billion MNT or 40% of total shares by this IPO. However, its good to note that this IPO took long time to go public.
This year BDSec is working to issue additional shares. They have announced to release 6 million additional shares, which is 39.7% of total shares. The rights holders can buy the shares at 1,931 MNT, and new investors can buy the shares at least 2,146 MNT. According to their prospectus, they are going to invest money they raised for two different directions; Investment and underwriting services – 94% and the “ESOP“ human resources development program – 6%.

Share Price Performance

BDSec JSC is a component of the MSE’s benchmark Top-20 index. The minimum price of the stock was MNT 1,600.00 and the maximum was MNT 5,900.00, which is recorded on 24 February 2011. The 52 week range standard deviation of the stock is 253.74. One important thing to note is that BDSec's share price performance is very much correlated with how Mongolian Stock Exchange performs and tied to the Mongolian capital markets. We believe BDsec needs to diversify their services in order to hedge against possible macroeconomic risks.

Asia Pacific Securities Recommendation

Asia Pacific Securities currently rates "BDS" as “SELL”. They may hold over 50% of the daily trading volume on the Mongolian Stock Exchange but APS believes BDSec has other major problems.
 
Their main source of revenue comes from their underwriting and brokerage services, and at the moment this type of business is not doing very well. APS believes that they cannot reach the expected 7.96 billion tugrik’s revenue this year as well as 12.6 billion next year. According to their financial report of second quarter, they have earned 1.12 billion MNT so far. We believe their expected revenue will come much shorter due to falling foreign investment coming into Mongolia and weak Mongolian currency.

We also believe raising cash through additional shares is a major concern. It will result a change in stock ownership, value per share, voting control, and earnings per share. Therefore, the current smaller stockholders will lose substantial value of their holdings after this process. Even though BDSec will re-invest the cash, we believe it would've been far cheaper to raise debt.
 
The company is planning to spend only 6% of total capital raised by additional share issuance to human resource development. Their lack of investing in their human capital might lead to other consequences to lose their competitive edge.
 
Just like other joint stock companies, stock concentration is very high for BDSec. However, issuing additional shares might increase their liquidity.

We value “BDS”’s per share at MNT 2,115.93, and the valuation is based on WACC of 4.50%, 3.85% of terminal growth rate, and regression analysis correlation of 0.33. The stock beta is 0.26%, which is somewhat weakly correlated with the MSE Top 20 index. 

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