Myanmar Part I

October 14, 2012 2:02 PM


For the better part of a year, I have been trying to find some free time to go and visit Myanmar. My good friend Chris Mayer seems to have beat me to it and in the first of what I hope will be many entries (keep writing Chris!!) posted some initial thoughts on his Capital & Crisis website.

 

"The heat rolled from the earth like the breath of an oven. The flowers, oppressive to the eyes, blazed with not a petal stirring, in a debauch of sun. The glare sent a weariness through one's bones... The evil time of day was beginning, the time, as the Burmese say, 'when feet are silent.'" -- George Orwell, Burmese Days

Dear Capital & Crisis Reader,

I read Orwell's Burmese Days on the plane ride over here. The heat is almost its own character in the novel. Orwell's vocabulary gets a workout describing its oppressiveness.

He knows of what he writes. Orwell was a colonial policeman for a time in British Burma. In my first day in Burma (now Myanmar), I learned to respect the sun. For example, I was going to walk to the famous Shwedagon Pagoda in the morning. But a friend told me I was crazy. "Remember you have to take off your shoes and walk barefoot," she said. "It can get uncomfortable in the heat. Go in the evening and see the sunset and the lights afterward. Or go at 5 a.m. and see the sunrise."

I went to see the sunset. In that 15-minute walk, a mere stroll, I was sweating through my shirt as if I had run 3 miles. It was still so incredibly humid, I can barely describe it. But the visit was well worth it. The towering golden stupa dominates the city. As the sun sets, the colors change around it. The mix of color and light, and the surrounding scene of worshippers and tourists from all over Asia, as well as the hundreds of smaller stupas at its base, make for a photographer's dream.

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Earlier in the day, sweating through rattling taxi rides without air conditioning, I met with the country's largest private oil tycoon and its largest property development company. After a few days in Yangon, I visited Mandalay, Bagan and Ngapali. I'll more on the investment scene here in a future letter. For now, some impressions on the city that was once Rangoon.

I took a taxi to downtown Yangon, near the river. I wanted to walk around the old part of the city, famous for its crumbling colonial architecture. In the 50 years of military rule, there has been practically no development here at all. It is a city trapped in time, a kind of Havana of the East.

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Motorcycles are banned in Yangon, which gives the city a very different feel than other Asian cities, where seas of motorcycles clog the streets.

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I couldn't walk too far without working up a good sweat. So I tucked into a bookstall on the street and picked up a copy of Sir James George Scott's Burma: A Handbook of Practical Information. It was a reprint of the 1921 edition by a small Bangkok press. Scott was one of those rugged Victorian adventurers of the British Empire -- tireless, brave, resourceful. He was a journalist who traveled throughout Burma. Scott learned to speak Burmese and donned native dress. His books are still read today, as he was meticulous in his research and descriptions of Burma, its people and cultures. Scott also introduced football (or soccer) to the Burmese, which today remains a national favorite.

I would enjoy dipping into Scott's book as I traveled through Myanmar, reading his take on places and people. (He also gives sound advice: "The sun should be treated with constant respect and covered head.") Scott spends considerable space on the commercial activities of the Burmese. There are headings for ruby mining, boring for oil, the extraction of jade, tea plantations, opium growing, teak exports, rice cultivation, finance and more.

The population of Rangoon in 1921 was about 340,000 and it was a busy port thanks to access to the sea as well as 900 miles of navigable river to the north. Today, Yangon has a population of 4 million and remains a busy port.

I also wanted to visit the Strand Hotel, the famous old colonial haunt where Somerset Maugham and Rudyard Kipling stayed and drank. I stopped in for a drink at the bar, to cool down after walking around hot Yangon and to soak up the atmosphere of the grand hotel.

I have to say, my first impressions of Yangon were not what I expected. After 50 years of military rule, I was expecting worse. (This is not to excuse the many crimes of the thuggish generals and their cronies. It, instead, is a tribute to the resourcefulness of the people.) The Burmese are poor, no doubt. But it is not a desperate poverty. Yangon gives at least the surface appearance of normality. I saw plenty of seemingly prosperous little shops. I was not approached by any beggars, as one is when in India.

The place has its charms. There are no McDonald’s or Wal-Marts -- thankfully. I met an expat that moved here recently after a stint in Saigon. She told me that it was the little things you miss. There isn't a good coffee shop in Yangon, she said, and finding a good cup of coffee is difficult. There isn't the night life you find in a typical big city. The number of good restaurants is relatively small.

But all this will change pretty soon. That's the opportunity, of course. There is already a pressing need for hotels, which are expensive and not so readily available at the upper end. There is already a shortage of apartments, too. As business opens up, as the investment dollars flow in and as the cranes go up, the old Yangon will change forever.

I was glad to get an early look.


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A Whole Lotta Coal....

October 12, 2012 12:18 AM


Back in early September, I took a trip to the South Gobi in Mongolia. I went to look at Erdenes Tavan Tolgoi (ETT), which owns the largest coking coal deposit in the world (now ramping up) incidentally named Tavan Tolgoi. While in the Gobi, I also got to get a good look at Mongolian Mining Corp's (975: HK) Ukhaa Khudag mine also ramping up, yet a few years further along. While there are no great investment inspirations from the trip, I am simply overawed with the size of these projects. When you go and look at them, you see the width of the coal seams and realize that they will be mining here for decades. Then you realize just how much cash these projects will pump into the Mongolian economy for years to come. With that, let's go look at some pictures...

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Any time that you go to the Gobi, half of the battle is just getting there. To call it remote is an understatement. Besides our pilot (coming towards the "terminal") and a few investors, there isn't much else to see...

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Until you suddenly come across the minesite itself. This is a view from the lip of the Tavan Tolgoi pit. Note the beehive of trucks and shovels moving around transporting coal. Then remember that each of these trucks is the size of a McMansion. That's a big hole, and they're just getting started...

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Remember again, that truck is about 100 feet away from me. It's the size of a house. Then look at how big the pit is. That's a whole lotta coal.

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Off in the distance, you can see the mine dumps for the "little TT" mine which is publicly traded on the Mongolian Stock Exchange with the TTL ticker. When they were deciding licenses, TTL got a little piece of the action.

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After going to Tavan Tolgoi, we went to see MMC's operation. MMC produced 7.1 million tons of coal worth $540 million in 2011. This year, production should ramp up to 10 million tons of run rate capacity. In addition, the company is adding a washing plant (blue, red and yellow) above which will increase the value of the coal that is sold.

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A wash plant serves to remove dirt, rocks and other waste materials from the coal. This improves the overall quality and lowers transport costs as you aren't transporting waste material. Naturally, this substantially improves the overall value per ton of the coal. Note that the yellow module was being built as I was there.

The coal enters the plant by conveyer...

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...it is then seperated from waste from the rock through a combination of crushing, screening and gravity...

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... and in the final phase, fine waste is removed using water...

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...side view

In summary, it's loud, it's wet but it makes the coal a whole lot more valuable--especially when you consider that it has to travel 250 kilometers by truck to the Chinese border.

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This is a picture of the Ukhaa Khudag mine pit. If TT's pit is big, this is many times bigger. There's a whole lot more coal to come...

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Mongolia Road Trip Part II

August 29, 2012 6:18 PM


Please see Part I for the first 2 days of our trip.

As we travelled around, we got to visit dozens of small cities that I would never have had a chance to ever visit. When you pass by rapidly, they really don't look like much...

Mongolia Trip City

...but once you stop and look around, you find all sorts of interesting sites to check out and people to see...

Mongolian darts

...like this young boy trying his luck out at darts....

Mongolia Trip YAk

or this herd of yaks enjoying the last few days of summer...

Soviet Debris

....of course there is Soviet era debris all over the place. One can only guess at what this factory once produced, or why some technocrat decided that this valley should have one factory and little else.

Mongolia Trip Canyon

Mongolia Lake with Ger

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Fortunately, there is plenty of great scenery to distract you from the rotting industrial carcasses.

Mongolia Trip Lake with Ger

Finally we reached our home for the night....

Mongolia Trip Lake

.... beautiful Terhiin Tsagaan Nuur (White Lake) next to the Horgo Volcano

Mongolia Trip Snow

It wouldn't be mid-August in Mongolia without waking up and being reminded that winter is only a few short weeks away...

Mongolia Trip Marmot Sales

Before heading back to Ulaanbaatar, I had one last mission--to try a local delicacy served up by these vendors...

Mongolia trip marmot

....marmot (tarvag in Mongolian)....

mongolia trip marmot cutting

...fortunately, my friends are experts at carving it up. What does it taste like? It isn't bad. It tastes like marmot, I guess... Then, I drank a huge glass of vodka, to ward off the bubonic plague that they sometimes carry....

mongolia trip rainbow

On the way back to Ulaanbaatar, we were treated to one final treat--a rainbow on the horizon. It's only fitting that summer lasts for a few short weeks here in Mongolia.... a full year of this would spoil us all.

 

All photos by Mili Martinez

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Mongolia Road Trip Part I

August 22, 2012 4:14 PM


I've now spent the majority of the last two years of my life in Mongolia, yet I haven't really ventured much outside of the capital of Ulaanbaatar. Last weekend, some good friends of mine took a roadtrip and I naturally decided to tag along. Here's the photologue of our trip. I hope you enjoy it as much as I enjoyed living it....

Hustai

We started at Hustai National park, an hour drive from Ulaanbaatar. Hustai is famous as it has the world's largest population of Przewalskii Horses, the native horses of the Mongolian steppes and is one of the only places in the world where you can see these horses in the wild.

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The Przewalskii Horse, the native horse of the Mongolian Steppe.

KharKhoren

After that, we continued west to Kharkorin, the ancient capital of the Mongolian Empire in the thirteenth and fourteenth centuries. Above, you can see the ancient walls of the Erdene Zuu monastery that were built over the ruins of Kharkorin in 1585. It's amazing to consider that this location was the capital of much of the world for over 100 years, yet few non-Mongolians have ever visited here.

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Gate in the walls.

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Erdene Zuu Monastery inside the walls.

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A stupa inside the Monastery grounds.

Mongolian Trip River

Of course, the whole countryside is full of amazing scenery with huge open expanses of grasslands, mountains, livestock and families tending their animals...

Mongolia Trip open area

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Mongolian Road Trip Part 2

mongolian road trip part 3

mongolian road trip part 4

Part II will be published next week. All pictures were taken by Mili Martinez.

 

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Kazakhstan Part II

August 3, 2012 4:46 PM


Please see Kazakhstan Part I if you missed it.

You cannot have a real estate bust without debt -- lots of it. When looking at real estate busts, very few American cities can even come close to the epic collapse that Almaty, Kazakhstan's largest city, experienced. Of course, to have a bust, you also need a boom, and here again, Almaty's ascent from Communism is the stuff of legends. American investors salivated over making 10% a year on their condos. In Almaty, that was a mundane month. I will admit that the data is very anecdotal, but as best as I can tell, Almaty property prices roughly doubled each year for almost a decade leading up to the collapse. Here is that story.

almaty map

When communism ended in 1991, all property was owned by the state. As happened in so many other former Soviet countries, there was a multi-year period of general chaos. Most individuals were unaware of property rights, and the laws didn't help clarify things. Essentially, whatever apartment you lived in when the music stopped, was yours. Then again, the apartments were drab and it seemed as though there were few winners -- especially as it was cumbersome to get property into your name. For almost a decade after communism, a nice 2-bedroom Soviet apartment in downtown could be had for around $10,000. Anecdotally, we heard that in the first few years after communism ended, an apartment could be had for as little as $1,500-$2,000.


Eventually, the Kazakh economy began to recover from the anarchy of privatization and it began to grow. Most of this awakening was caused by huge increases in oil revenues due to the twin boons of expanding production and rapidly rising prices. Starting in around 2000, property prices began to rise in a parabolic fashion and they didn't stop for eight more years. By 2002, Western firms began to send professionals to Kazakhstan to oversee their oil projects. Of course, while most of the oil was in the west, the oil workers wanted to spend their weeks off in the relative tranquility of Almaty. These workers bought, or more likely rented their apartments, which slowly added energy to the ascent of property prices. Of course, Western firms bring with them all of the accoutrements of modern public companies -- accountants, lawyers, auditors, consultants and well-heeled executives. As these people began to flood into Almaty, they also needed housing and by 2004, property prices began to increase at an even quicker pace. Of course, the gradual creation of a mortgage market didn't hurt prices either. However, "buy now in order to sell later (at a higher price of course)" did not enter the borrowers lexicon for at least another year.

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Back of a Soviet Apartment.


Locals were quick to notice that apartments had increased in price by a few times in just a few years. Their natural response was to buy extra units as investments. Of course, with the foreign population of downtown expanding, and no new supply of apartments, this only further pushed up prices. From the late 1990's until roughly 2004, prices for a 2-bedroom Soviet apartment increased from $10,000 to about $50,000.


It's difficult to really judge what 'fair value' of an apartment is. It's essentially worth what someone is willing to pay for it and without a functioning banking sector, most property buyers were cash buyers. When you look around the world, one of the most common metrics to use when thinking of how to value dwellings is to compare them to after-tax income of the owner. I hate to generalize too much, but in the majority of countries, the average housing unit is valued at between five and ten times after-tax income of the owner. By that metric, apartments in Kazakhstan were expensive for locals, but quite cheap compared to the average foreigner living in one. This is where the fun began -- how much could a foreigner be pushed to pay in rent?

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Front of a Soviet apartment building with shops.


By 2005, banks began to relax lending standards while simultaneously finding a whole lot of foreign capital -- mainly wholesale deposits. After enduring a decade of high borrowing costs, Kazakh banks suddenly seduced Western financiers to lend them money at rates that were only slightly higher than LIBOR. Between 2005 and 2008, foreign banks lent $45.1 billion to a banking system that was only $8.6 billion in total equity in 2005. Of course, the Kazakh banks did what all banks do when faced with massive depositor inflows -- they found absolutely asinine projects to lend stupefying sums to. We will return to some of these construction projects later on, but on a more retail level, the banks also lent huge sums to property speculators.

While I cannot confirm any of these stories and they are somewhat one-off in terms of situations, they're simply too juicy not to relate;


With a massive shortage of available space in downtown, and Westerners desperate to rent in downtown, rental rates spiraled out of control. By 2007, an apartment that a few years earlier had cost $10,000, now rented for almost that much EACH MONTH. Of course, the renters were oil workers, embassy officials and the usual suspects that have someone else's money to spend. As foreigners fought for the few leasable apartments, employees demanded ever higher monthly rental allowances from their employers -- which only further pushed up prices. As demand overheated, apartment owners demanded one year of rent up-front, then two years of rent up-front. Suddenly, it cost over a hundred thousand dollars up-front to rent a 700 square foot apartment for two years. It made no sense. Meanwhile, the apartment owner took the deposits and used them for down payments on a few more apartments. The banks didn't know or care where the money came from.


Then the government got in on the action. Drunk with petro-riches, the city of Almaty embarked on a massive infrastructure and beautification program. The government would routinely go out and pay two or three times market value for apartments in buildings that they intended to demolish. Almaty got wider streets and new highways. Government officials who were tipped off about which buildings would be purchased made fortunes. Meanwhile, speculators tried to guess about which buildings were next and would regularly bid apartment units up to prices that made no sense -- only to learn that they were buying in the wrong building.


The sudden wealth boom (real money and pure bank leverage mix in strange ways) led to a boom in personal consumption. Per capita GDP in Kazakhstan went from $1,200 in 2000 to $8,400 in 2008. Meanwhile, the wealth increases in downtown Almaty were even more extreme. Luxury boutiques opened up all over the place. Unfortunately, there were no luxury malls -- there was essentially no purpose-built shopping at all. No worries, just kick out the apartment wall facing the sidewalk, build up a few extra meters of space with cinder blocks, and you have a new store. Meanwhile, rents went to insane levels. I heard stories of landlords who would break leases and kick out international luxury retailers because they now wanted $200 a foot and the retailer had signed for $100 a foot just a few months earlier (those are Manhattan prices). Landlords would leave locations vacant rather than risk signing a multi-year lease at current market prices, as rents were increasing at 10% a month and doubling each year. It seemed as though as soon as you signed a lease, you were on the wrong side of the transaction because rents just continued to rise. Suddenly, store-fronts were vacant, not for lack of business, but because people refused to lock in leases -- which only drove rental prices even higher for tenants that could find places to rent.

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A Brioni store sticks out of a Soviet apartment building. A nice suit now costs more than the whole storefront was worth twenty years ago.


Of course, with such high prices, property developers rushed into the fray and offered new luxury condominiums and shopping malls. Naturally, almost all of this was funded with debt that was extended to those who were politically connected. (It's not altogether ironic that when the BTA Bank failed, it was alleged that most of the bad loans were made to its chairman and his business interests).

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Another tower in Almaty still awaiting funding...


Eventually, a combination of factors broke the bubble. To start with, prices had long ago stopped making sense. At its peak, a 2-bedroom Soviet apartment was worth more than $500,000 -- if you could find anyone willing to sell it to you. We heard of a number of transactions that were priced at over $1,000,000. By then, speculators could no longer afford to make payments on their borrowings. The game only worked as long as Kazakhs could continue to borrow money against their rapidly increasing real estate. The Kazakh banks would have probably continued to lend against ever increasing prices, had overseas investors not forced their hand.


Starting with the March, 2008 collapse of Bear Stearns, financial institutions started asking questions -- obvious questions, like why have we been lending so much money to Kazakh banks? The wholesale funding started flooding out, even more rapidly than it had flooded in. By the third quarter of 2008, banks in Kazakhstan were facing a liquidity crisis, which was suddenly accentuated by rapidly declining oil revenues as the price of crude began its descent from over $140 a barrel to $30. Without bank lending, property prices could no longer go up, instead, banks were calling in loans. What had taken nearly a decade to build up, came crumbling down in a weekend.


I know they're a bit hyperbolic, but most property investors told me that prices essentially went no bid one day, and a few months later, when bids finally showed up, prices were down by over half. In the US, the government cushioned the fall in property prices. In Kazakhstan, the government was hard pressed to do much more than nationalize the two largest banks and take sizable stakes in a few others. Most Kazakhs were still in shock at just how quickly prices came apart.

kaz mountain view

Almaty is a beautiful setting for a city, just on the side of snow-capped mountains. Unfortunately, your author doesn't have the photographic skills to capture it adequately....


Despite overshooting dramatically to the upside, and then collapsing even more dramatically, Almaty property has been a great investment over the past decade. After advancing from $10,000 to over $500,000, the average 2-bedroom apartment in downtown seems to have settled out at around $300,000. If you bought in at any time before the final two years, you are still up on your investment. A combination of expanding wealth, a rapidly growing middle class and the concentration of wealth in Almaty's downtown has led to excellent upside. As the GDP of Kazakhstan continues to expand, and the banks slowly re-liquefy, I would expect to see interest rates continue to decline, leading to further price increases. I wouldn't tell you to buy property in downtown Almaty, but it's probably not a terrible investment either. In Part III, I'll go over some of the other investments that I found to be much more interesting in Kazakhstan. For a growing economy, many assets seem unusually cheap.

 

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