Asashoryu, the great sumo wrestler whose pride in his Mongolian origins and culture may have led to his early retirement, wasn’t the first powerful fighter from those vast steppes. Nearly a thousand years earlier, one of his for bears had tried to take not just the sumo crown but the entire archelago, but even the great Genghis Khan could not overcome the Divine Wind that arose to rescue Zipangu.
Many great wrestlers followed close on Asashoryu’s heels, the way Hawaiians once followed the wonderful American rikishi, Takayama.
But for savvy stock market investors there is another way to play the newest twist on the long but intermittent engagement between Mongolia and Japan, and that is to place a bet on the rich potential value implicit in ownership of more than 50% of the best little bank in that far-flung frontier market of Mongolia where shares on the tiny local exchange trade mostly by invitation only. Khan Bank, perennial winner of “best bank” and other accolades from the financial journals is in fact majority owned by a rather obscure Japanese outfit with shares listed in Osaka called Sawada Holdings (8699).
The name Sawada comes from the name of the founder and chairman, Hisashi Sawada. Sawada is one of Japan’s more recent post-war entrepreneurial success stories, the popular and well-regarded travel agency HIS (9603). The initials stand for the phrase “highest international standard,” which adds HIS to the list of listed companies that have their corporate mission statement in their name for all to see and u dear stand. (My favorite in this department is auto-parts distributor SPK, the meaning of which is not necessarily intuitive! “Sincerity, Passion and Kindness.”)
Sawada Holdings is a different kettle of fish – a loose and somewhat haphazard bundling of businesses in which the founder and his management took interest at one time or another. An online brokerage, a taxi and bus operator, a part interest in a once bankrupt condo developer, an online retail insurance broker – and lo and behold, Khan Bank.
Sawada was urged to buy the former state-owned bank by Mongolian officials when he visited there in 2006, ostensibly to search for travel destinations for his agency. HIS caters to a more adventurous younger segment of the travel population, and frontier destinations are popular.
Today, Khan Bank is an anomaly in this quiver of businesses not for it’s location, but for its extraordinary quality of growth as well as earnings. In fact, Khan is so profitable it offsets the drag of several money-losing Sawada units such as Ascot, the condo developer, HS Securities, and HS Futures, the commodity brokerage.
This afternoon Sawada told the dozen or so analysts who attended the company’s FY 2011 results meeting that he has begun to prepare the bank for a separate listing in two or three years. Where? “Either Hong Kong or London.”
What is it worth, does he have an independent mark to market valuation? Book value of shares in affiliates comes to just over ¥12.3 bn. but at least half of that is accounted for by other holdings. “What did we pay the government when we bought the shares?” he asks his CFO, also seated at the head table. “Something like ¥6 bn.,” Sawada says with insouciant imprecision. “But before the Lehman crisis, one global broker suggested a price tag between ¥70 bn. and ¥80 bn.”
Will Sawada Holdings pay a dividend for the year ended March 2011? “No, I am afraid not.”
Did Sawada Holdings receive a dividend from Khan, then? “Yes, last year, but there is such a capital shortage in Mongolia now, we did not want to take the money out.”
What is ahead for the bank, which has grown mostly as a retail operation. Says its chairman: “More corporate loans, and more growth from mortgages which are still in their infancy, but will expand rapidly in lime with the housing boom in the capital region.”
Today, Sawada trades at a 30% discount to its stated book, but a book value which dramatically understates the value of the 52.8% position in Khan – barring, Sawada says, “a dramatic I,poison of the world economy.”
So frontier investors should take note of this rather quirky opportunity. Mongolia, Myanmar, Mozambique are far-flung frontier outposts that will likely one day to be home to more than one Japanese company. But none is as alluring at the moment as Khan Bank, provided Sawada’s penchant for making more dumb deals than wise ones does not get the better of him!