E-Trans Logistics (ETR:MO) Freight Transloading Facility Price Target MNT 154; Close MNT 120

E-Trans Logistics (ETR:MO) Freight Transloading Facility Price target MNT 154; Close MNT 120

• We are initiating coverage of E-Trans Logistics (ETR:MO) with a BUY Odbayar Oyunbaatar rating, with one-year target price of MNT 154 per share or a potential [email protected] total return of 28%. Phone/fax: (976) 11-323411 • E-Trans Logistics (ETR:MO) is the only non government owned transloading facility at the busiest-border point of Mongolia-China at Zamyn Uud, which covers 90 percent of the country’s import traffic. Priced on 6 May 2013 • Mongolian trains run on 1,523 mm (Russian gauge), while China uses 1,435 mm (standard gauge). As trains encounter a different gauge on MNT 154 the Mongolian-Chinese border, freight must be transloaded.

MSE ETR • At the peak of traffic, cargo delivery from China is delayed up to Bloomberg ETR:MO 20 days. The port congestion is deteriorating in recent years due to enhanced Mongolia-China trade. The total value of Mongolian 12M hi/lo MNT 110/143 imports were doubled in two years, and increased tenfold in 10 years. 12M price target MNT 154 The existing rail and transloading capacity is insufficient to meet +potential +28% expected output increase in the coming years. • We believe that Zamyn Uud’s location will prove even more Shares outstanding 46.2m important in the years ahead, because of increased shipping along Free float 17% the already-busy route along Trans Mongolian Railway, and ETR will Major shareholder E-Trans LLC take advantage of the growing market. Market cap MNT 5.5b (US$3.9m)

Stock performance of ETR since its IPO In Mongolia, there exists only a 1,110 km Trans-Mongolian Railway line, 145 which connects Sukhbaatar in the north and Zamyn Uud in the south 140 through the capital city Ulaanbaatar. A separate railway line of 239km exists 135 in the east of the country. Trans-Mongolian Railway is close to its capacity 130

125 of 21 million tonnes (Mt). With 26Mt of orders received from customers this 120 year, there is a bottleneck to increase supply to the market. 115

110 The gauge difference will always be there as Mongolia decided the planned

105 5,683 km railway to be built to Russian gauge standard. The government industrial project the Sainshand Industrial Complex Source: BDSec (SIP) will be built in Sainshand, which is located on the Trans Mongolian Railway and 470 km and 230 km away from Ulaanbaatar and Zamyn Uud, respectively. Once completed in 2017, SIP will produce 4.5Mt of steel, 2Mt Shareholders of coking coal, 1Mt of cement, and 450,000 tonnes of cathode copper each year and the most of them will be exported through Zamyn Uud border point.

Free Float There is also a government decision to establish four free trade zones 17% (FTZ) including Zamyn Uud, but it has been delayed due to inexperience. According to the government plan, the project will be completed by 2015.

E-Trans LLC Mongolian 50% Transportation Holding 33%

Source: BDSec

The Trans-Mongolian Railway is the shortest route from Beijing to Moscow Mongolia is a landlocked country located between Russia and China with a total area of 1.57 million square km, sharing a 4,673 km (2,903 mi) border with China to the south and a 3,485 km (2,165 mi) border with Russia to the north. Because of geo- graphic location, vast territory and the economy which relies on mineral exports, railways and roads have an important role to play in the transport system. Rail transport is an increasingly important mode of transport for the exports. Mongolia’s rail network connects with Chinese railways in Zamyn Uud in Mongolia and Erlian in China. Currently there exists only a 1,110 km Trans-Mongolian Railway line, which connects Sukhbaatar in the north and Zamyn Uud in the south through the capital city Ulaanbaatar. Other important stops are Sukhbaatar, Darkhan, Choir, and Sainshand. There are also some important branch lines to Erdenet, Baganuur and Sharyn Gol. Trans-Mongolian Railway, which connects to the famous Trans-Siberian Railway, is the shortest rail route between Beijing and Moscow. Because of underdeveloped railway structure and outdated equipment, Mongolia is not taking full advantage of the rail potential. More than 90% of the export, mainly minerals are going out to China by trucks. In- frastructure is massively needed. Trans-Mongolian Railway is close to its capacity of 21 million tonnes (Mt) at the moment. The existing rail capacity is insufficient to meet expected output increase in the coming years.

The shortest rail route from Beijing to Moscow is through Mongolia

Trans-Mongolian Rail- way, which connects to the famous Trans- Siberian Railway, is the shortest rail route between Beijing and Moscow

ETR

Source: Trans-Siberian Handbook, BDSec

In 2012, the amount of rail transport reached all time high of 20.3Mt. With 26Mt of orders received from customers this year, there is a bottleneck to increase supply to the market. The traffic of transit cargoes between China to Russia is poised to grow 30 percent to 2 million tonnes this year, according to the railway authorities of Mongolia. They had a meeting with railway authorities of China and Russia last February and agreed The existing rail ca- on the amounts of transit transportation between the three countries for the year. Ac- pacity is insufficient to cording to the agreement, amount of rail transportation from Russia to Mongolia is meet expected output set at 1.7Mt, from Mongolia to Russia at 947,000 tonnes, from China to Mongolia at increase in the coming 1.36Mt, from Mongolia to China at 6.5Mt, from Russia to China at 280,000 tonnes, years and from China to Russia at 1.7Mt. Agreement of 12.5Mt of transit transportation over the Mongolian railway has made in total for this year, which is 17 percent higher than the previous year. To enhance transport capacity, Mongolia and Russia agreed in late 2012 to raise the equity fund of US$125 million each for the existing railway, which will be used for technical renovation and increase freight transportation capacity by 15-20% to 28-30 million tonnes per annum.

the length of time con- Ulaanbaatar Railway, a Mongolian-Russian Joint Venture company which owns Mon- sumed by a freight train golian railway structures, bought 7 new locomotives and rented 150 freight trains from one loading to the from the fundings in the first place. Now Ulaanbaatar Railway has some 1,500 railway next between Zamyn Uud trains available. Ministry of Road and Transportation, Ministry of Construction and and Ulaanbaatar is to de- Urban Development, Bank of Mongolia, Mongolian Customs General Administration, crease to 66 hours from transload facilities and cement importers gathered all together in Zamyn Uud last 96 hours, which means month to find a remedy for the situation of delayed freight transportation. They think more trains will be avail- they can decrease the length of time consumed by a freight train from one loading to able the next between Zamyn Uud and Ulaanbaatar to 66 hours from 96 hours this year by working together

Mongolia carried freight, thousand tonnes

35,000

30,000

25,000

20,000

15,000

10,000

5,000

- 2009 `10 `11 `12 `13F Auto Transport Rail Transport

Source: NSO, BDSec

Break-of-gauge problem to persist, demand for transloading to increase

90% of Mongolian Mongolian trains run on 1,523 mm (4 ft 11 5/6 in) (Russian gauge), while China uses imports pass through 1,435 mm (4 ft 8 1/2 in) (standard gauge). As trains encounter a different gauge on Zamyn Uud on the the Mongolian-Chinese border, either train undercarriages have to be changed or Mongolia-China border freight must be transloaded at the border. The former one does not work for trains loaded with large amount of freight.

60 percent of the world’s railways use a gauge of 4 ft 8½ in (1,435 mm)

Source: BDSec

90 percent of the total Mongolian imports pass through Zamyn Uud port. Starting from April, the port suffers heavy burden in cross-border transport with some 8,000 pas- sengers and 1,500 vehicles crossing every day. At the peak of traffic, cargo delivery is delayed up to 20 days. The port congestion is deteriorating in recent years due to enhanced Mongolia-China trade. There are two things to blame for delayed freight. The one is underdeveloped railway Mongolian trains run on with shortage of locomotives and freight trains. The other one is break-of-gauge. A 1,523 mm (4 ft 11 5/6 in) break-of-gauge occurs when the railways of neighbouring countries have different (Russian gauge) track gauges and it adds huge delays, cost, and inconvenience, causing a traffic which leads to price increase for end user. Central Bank of Mongolia and Government of Mongolia are working together on sta- bilizing prices of key commodities such as petroleum goods, meat, vegetable, flour, and construction materials. They are trying to decrease the length of time consumed by a freight train from one loading to the next and reduce transportation costs that result in sudden price increase for the import products. Within the framework of this goal, number of freight trains travelling between Ulaan- baatar and Zamyn Uud in a day increased to 180 from 110 starting late 2012. Bank of Mongolia also agreed to support with MNT 303 billion for purchasing new freight trains and locomotives.

An additional border terminal would contribute on decreasing traffic at the border. A plan and finances for a construction of new terminals have already been solved. The prime minister obliged related ministries and authorities to start the new terminals by this June. Within the framework of “Border Checkpoints Renovation” program of the Mongolian government, MNT 33 billion worth work started on 17 April, 2013 to imple- ment a plan on improving passing capacity between Zamyn Uud and Erlian. A road of 2.3 km from the border point for heavy duty trucks to the Customs Control will be ready by June 15. The work is to be financed by the Mongolian side and executed by 60 percent of the world’s railways use a gauge of 4 ft 8½ in (1,435 mm) a Chinese company, as stipulated in an contract. Planned railway expansion It’s highly likely we can expect more of the break-of-gauge problem for the next dec- The planned 5,683 km ade or so, as the Mongolian government decided the planned 5,683 km rails to be rails will be built to Rus- built to Russian gauge standard, citing national security and overdependence on sian gauge standard, China on export. This means the already high demand for transloading of products which means the already between freight trains and trucks will keep increasing along with the railway capacity. high demand for trans- Mongolian Railway invited investors in the new railway project in February, 2013. To- loading of products be- tal of 1937 km of railway will be built as Phase 1 and 2 of the new railway project. The tween freight trains and capital expenditure cost estimate is approximately USD 5.2 billion, under BOT terms. trucks will keep increasing. Mongolian government has recently decided to spend USD 200 million to start the new railway project from the USD1.5 billion sovereign bond raised last year.

Expansion of Mongolian Railway Network

Source: Ministry of Road, Transportation, Construction and Urban Development, BDSec

Mongolian Foreign Trade Mongolia has built-in customer bases, China just to its south and Russia to its north. The country has the geography and natural resources endowment. Mongolian economy expanded 17.5% in 2011 and 12.3% in 2012. The growth of Mongolia is mostly driven by investment into mining sector. However none of the large mining projects are currently in production or anywhere near peak production. We predict double digit real GDP growth, coupled with single digit inflation for the next few years with the massive mines like Oyu Tolgoi and Tavan Tolgoi go into production. As the economy expands, demand for quality food, construction materials, equipment, machinery and cars etc is increasing. Compared to 2011, the growth rate of foreign trade decelerated in 2012. The Na- Mongolia has 53% of tional Statistical Office (NSO) data show that in 2012, the total foreign trade turnover total trade turnover comprised US$11.1 billion, 2.6% less than a year before. In 2011, total foreign trade with China, 17% with increased by 85%, while exports jumped 64% and imports doubled. However in 2012, Russia as of 2012 import grew only 2% in value terms while export declined 9% caused by major export products decline. However, the decline in exports has been resulted from price decreases, rather than volume decreases. Coal led the export products for the second year, followed by copper, iron ore, and crude oil. Mongolia kept its position as the largest supplier of coking coal to China in 2012, but because of underdeveloped railways, the share declined to 36% from 45% in 2011. Almost all coal exports go out to China by trucks through Gashuun Sukhait and Shiveekhuren border points. Mongolia’s main import commodities in 2012 were fuel, trucks, cars, machinery, equipment and food products. China, which has overtaken Russia to become the most important source of Mongolia’s imports in 2011, supplied 27.6% of Mongolia’s imports in 2012, followed by Russia (27.4%), USA (8.0%), Japan (7.4%), South Ko- rea (6.9%), and Germany (3.7%).

Import products of Mongolia as of 2012, `000 USD Export products of Mongolia as of 2012, `000 USD

5,000 7,000

6,000 4,000 5,000 3,000 4,000

3,000 2,000 2,000 1,000 1,000

- -

Source: NSO, BDSec Source: NSO, BDSec

China has replaced Russia to become the largest importer

China 19% 28% Russia

4% USA Japan 7% South Korea 7% Germany 27% 8% Others

Source: NSO, BDSec

Over 90% of exports going out to China by trucks

Coal led the export products for the second year, followed by copper, iron ore, and crude oil.

Source: Tuushin

Zamyn Uud as a free economic zone Zamyn Uud is the largest trade hub in Mongolia with existing railway and auto road and Mongolia gets the nearest access to the sea from here. Mongolian government decided to establish a free economic zone in Zamyn Uud way back in 1995 in aim of facilitating freer flow of trade and businesses. But the things have been slow and no major improvements have been seen. In 2011, “Zamyn Uud” master plan was affirmed by the government and direction was given. Now the new government is refocusing their attention on the project. Zamyn Uud has recently solved the issues of engineering lines, sewage, streets, and roads. Prime Minister Altankhuyag said the road from the capital of Ulaanbaatar to Sainshand will be opened in September this year, which will make Sainshand a transport hub connecting Asia and Europe.

Mongolia will develop industrial park in the Gobi Desert Mongolian government is building factories and bringing offices, technology and jobs to the Gobi Desert. The government has included the construction and operation of Sainshand Industrial Complex (SIP) in its upcoming four year plan as well as in the short term plans of the Ministry of Agriculture and Industry. The project involves establishing a modern industrial complex, including a copper refinery factory, as well as construction material and coal-chemistry factories. The construction of the complex is expected to create nearly 10,000 jobs, and the fully operational facility will require around 2,400 workers. Developers expect that the complex will have the capacity to produce 4.5 million tonnes of steel, 2 million tonnes of coking coal, 1 million tonnes of cement, and 450,000 tonnes of cathode copper per year. Early estimates suggested that the complex will cost around USD 10 billion to build and about USD 4 billion is needed to build infrastructure such as a power distribution network and a waste water facility. The government is planning to sell 66 percent of the stake in the planned industrial park, which will be fully operational by 2018.

Layout of the Sainshand Industrial Park

Developers expect that the complex will have the capacity to produce 4.5 million tonnes of steel, 2 million tonnes of coking coal, 1 million tonnes of cement, and 450,000 tonnes of cathode copper per year.

Source: Bechtel Corporation

The government plans to invest MNT 75 billion (USD 53.2 million) for the development of the industrial park this year, said the prime minister Altankhuyag. The Development Bank of Mongolia has agreed to finance MNT 14.1 billion (USD 10 million) necessary to conduct an environmental evaluation of the location, plans, and counselling and advisory services for the SIP project.

E-Trans Logistics Founded in 2010, E-Trans Logistics (ETR:MO) is the first and only privately owned transloading facility at the busiest-border point of Mongolia-China at Zamyn Uud, which covers 90 percent of the country’s import traffic. ETR’s transloading facility is connected to the main railway line by two spurs which can hold up to 34 freight trains at once. The design capacity of E-Trans Logistics is transloading 2,000 freight trains a month or 1.5 million tonnes of freight a year. All shipment-related services including state specialized inspection agency, customs clearance, warehousing, and banking services are offered at the One-Stop center of ETR, giving the Company a competitive advantage over its peers. Other advantages worth mentioning in the Company are being located closest from the customs inspection zone, fast and customer friendly services as being a private company, experienced management team and having necessary infrastructure including land, rail spurs, warehouses, office building, power, and heat etc.

Number of freight trains loaded and unloaded by ETR

700

600 The design capacity of ETR is transloading 2,000 500 freight trains a month 400 or 1.5 million tonnes of freight a year 300

200

100

0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2011 2012 2013

Source: Company, BDSec

ETR handled 315 thousand tonnes of freight in 2012. Considering their annual design capacity to be at 1.5 million tonnes, the capacity utilization was only 21 percent. Because of shortage of freight train supply, the Company is not using its full capacity. About 800,000 tonnes of cement were imported through Zamyn Uud which is about 60 percent of total heavy weight trucks passing the border point in 2012. ETR handled 1/5 of that cement import. ETR’s parent company, E-Trans LLC is a freight forwarder. Established in 1997, E- Trans’ main business is to handle shipments between China and Russia. E-Trans initiated a project of transloading facility in 2007 and later separated its transloading business by establishing a new company which is ETR now. Enkhbold.Ch, a key person of the ETR, is board chairman of ETR and CEO of E-Trans. He has 25 years of experience in transportation.

Transload illustration

1 2 3

1. Because of break-of-gauge, product from China passes Mongolian border on truck 2. Transload facility at the border (e.g. E-Trans Logistics) loads product on freight train and releases train to Ulaanbaatar or rail-served receiver or stores product at transload facility 3. Product travels by freight train to receiver

1 2 3

1. Mongolia’s rail served shipper loads product on freight train and releases to railroad to China 2. Because of break-of-gauge, product must be unloaded and loaded to truck or stored at transload facility (e.g. E-Trans Logistics) 3. Product travels by truck to receiver or China’s railway

Mongolian construction sector has been growing rapidly due to the country’s fast ur- banisation in recent years. Today about 60 percent of the city’s 1.2 million people live in ger districts (traditional Mongolian yurt) without access to public services. These people need modern apartments and re-planning of “ger” area is in process right now. As income level increases in Mongolia, people living in apartments are also demand- ing higher standard apartments. The growth in the construction market is giving rise to a surge in demand for building materials. For example, Mongolia’s annual cement consumption has increased 10-fold to 1.5 million tonnes in the last ten years.

Almost half of freight handled by ETR in 2012 was cement

700 600 500 400 1/5 of the total cement import passing through 300 Zamyn Uud in 2012 were 200 handled by ETR 100 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Cement Others

Source: Company, BDSec

E-Trans Logistics became a Mongolian Stock Exchange listed company in April 2012, raising its targeted MNT 924 million. The Company has successfully finished the building projects stated in the prospectus. The three-story office building of 1,800 square meter was commissioned in late 2012. They also finished the building of 5 warehouses of 1,200 square meter each and paved a field of 1,200 square meter for heavy truck vehicles parking.

All necessary infrastructures in place

Source: Company, BDSec

This year, management expects 20-30 percent increase in revenues. Management Management expects plans to purchase more packaged and bulk materials handling equipment to speed 20-30 percent increase in up transloading works and purchase some heavy trucks to transport freight between revenues this year Zamyn Uud and Erlian on their own in the near future to expand the business. The length of time consumed by a freight car from one loading to the next between Zamyn Uud and Ulaanbaatar is 4 days at the moment. So with over 1,500 freight cars owned by Ulaanbaatar Railway, Mongolian freight trains are in short supply at the moment.

The Company is working There is a possibility that ETR can get a license of customs bonded warehouses. on getting license That way, companies in Ulaanbaatar can have just-in-time delivery from the customs of customs bonded bonded warehouses in Zamyn Uud. warehousing A Customs Bonded warehouse is a storage facility licensed by the Customs for the storage of goods imported into the region pending the payment of duties. Their function can be to hold goods that are pending clearance or used as a place to unload goods from one mode of transportation and reload them onto another without having to clear the goods through customs.

There are 3 transloading facilities in Zamyn Uud other than ETR. They all run by Ul- aanbaatar Railway. The transload facility No.1 takes product from Mongolian rail to Chinese rail and from trucks to railcars or vice versa. The transload facility No.2 only handles containerized goods whereas the transload facility No.3 takes product from trucks to railcars or vice versa. Risk of new entrants is low as the business requires a lot of infrastructure and experience. The government has been talking about building a new transloading facility in Zamyn Uud for a long time. We do not think it will be ready in next few years. Even with additional transloading facilities in Zamyn Uud, ETR should do fine as a huge excess of demand over supply exists and being the first transloading facility with one- stop service.

E-Trans Logistics is the closest transloading facility to the border with Customs Inspection Zone in it

Source: Image retrieved from Google Earth, BDSec

ETR has the best location in Zamyn Uud. Not only it is the nearest transloading facility to the Mongolia-China border, ETR has managed to bring Customs Inspection Zone into its territory which means almost all products passing through Zamyn Uud border must stop by ETR. So customers can have their freight transloaded, transported, shipped, or warehoused right after Customs clearance instead of sending the freight to the next stop. Plus all the trucks passing through Customs Inspection Zone pay parking fee to ETR. Last year, the Company pocketed an extra MNT 150 million from parking fees. ETR managed to estab- ETR has now all the necessary infrastructures in place including parking, warehouse, lish this one-stop service land, office building, rail and auto road access, and all Customs related services. that government and state owned companies were It maybe a cliché that the private companies provide the energy for economic growth, talking about for years. but it is true specially for countries like Mongolia which made a transition to a democ- racy and a market economy just over 20 years ago. ETR is a tiny company, but it has a disproportionately large impact on the transportation sector of Mongolia. Mongolian private enterprises have been more innovative and efficient compared to state owned companies. For instance, ETR managed to establish this one-stop service that government and state owned companies were talking about for years.

Valuation Since E-Trans Logistics is a young company and given the fact that there are not many comparable publicly traded companies in the same sector, we value the Company using a Net Present Value approach which yields our target price of MNT154/share or a potential total return of 28 percent. We note, however, that this valuation is highly dependent on our assumptions. We expect that sales revenues from transloading activity to increase by an average of 20 percent for the following years. The Company is using only 21 percent of its design capacity at the moment because of Mongolian underdeveloped railway and shortage of freight train supply. Starting this year, E-Trans Logistics is generating some extra income from heavy duty truck parking, warehousing and renting spaces in the newly built office building. Operating cost are heavily dependent on railway cost charged by Ulaanbaatar Railway as it is accounting for 89 percent of total operating cost. We expect the railway charge of Ulaanbaatar Railway and ETR’s charge per freight car to increase by an average of 5 percent starting next year. The table below summarises our valuation analysis.

Cash flow projection of ETR million MNT

2012 `13F `14F `15F `16F Revenue from transloading 5,633 6,760 8,517 10,732 13,522 Revenue from parking 150 158 165 174 182 Revenue from rent 9 43 45 47 50 Revenue from warehousing 10 100 130 169 220 Railway expenses 4,985 5,982 7,537 9,497 11,966 Capital expenses 1,800 250 300 345 380 EBITDA 346 583 703 853 1,043 Net profit after tax 96 297 392 513 668 Net cash flow (1,245) 342 379 454 577

NPV @12% discount 7,117 # of shares (million) 46.20 Price per share (MNT) 154

Source: BDSec estimation

Appendix: Balance Sheet

2012 MNT`000 2011 MNT`000 Current Asset Cash, cash equivalent 27,143.78 17,783.13 Short term investment - - e-Valuation allowance - - Accounts receivable 20,129.22 7,673.16 Adjustment of doubtful receivables - - Other receivables - - Inventory 24,723.23 6,729.31 Livestocks - - Prepaid expenses - 286,091.00 Working products - 8,632.93 Amount of current asset 71,996.23 326,909.52 Non-current asset - - Fixed asset 5,264,560.39 3,668,090.98 Accumulated depreciation (171,336.75) (76,295.46) Other fixed asset 723,472.22 602,977.97 Accumulated depreciation (110,211.48) (42,072.67) Incomplete building - 13,946.08 Land 823,000.00 823,000.00 Intangible asset 172,484.10 120,370.00 Accumulated depreciation (25,223.32) (9,966.67) Investment and other asset - - Valuation allowance - - Amount of non-current asset 6,676,745.16 5,100,050.24 AMOUNT OF TOTAL ASSET 6,748,741.39 5,426,959.76 DEBT AND EQUITY Short term liability - - Account payable 623,102.51 - Salary payable - - Income tax payable 1,855.02 - Population income tax payable - - VAT payable - - Other tax payable 1,879.13 1,189.11 Health and social insurance payable - - Dividend payable - - Short term bank loan 363,009.56 567,192.00 Other liabilities - - Prepaid income - - Amount of short term liabilities 989,846.23 568,381.11

Appendix: Balance Sheet (cont’d)

2012 MNT`000 2011 MNT`000 Long term liabilities - - Long term note payable - - Long term loan - - Long term bond - - Other long term liabilities - - Long term payable deduction - - Amount long term liabilities - - Amount of debt 989,846.23 568,381.11 Equity - - a. State owned - - b. Privately owned 4,774,000.00 3,850,000.00 Pocket shares - - Amount of equity - - Additional paid in capital - - Reserve of revaluation - - Other equity 823,000.00 942,600.00 Accumulated profit 161,895.16 65,978.65 During balance report 95,916.51 - Before balance report 65,978.65 65,978.65 Amount of equity 5,758,895.16 4,858,578.65 AMOUNT OF DEBT AND EQUITY 6,748,741.39 5,426,959.76

Appendix: Income statement Appendix: Statement of cash flow

2012 MNT`000 2012 MNT`000 Major operational income Cash flows of operating activities Sales revenue 5,802,264.88 Cash receipts of operating activities 5,838,854.56 Sales returns - Cash receipts from customers 5,820,684.02 Amount of sales revenue 5,802,264.88 Cash receipts of insurance compensation 1,170.54 Cost of goods sold - Prepaid income 17,000.00 Gross profit (loss) 5,802,264.88 Cash disbursement of operating activities 6,445,730.34 Operational Expenses - Cash paid to employees 131,930.81 Salary and bonus 130,647.25 Cash paid to social insurance organization 18,140.26 Interest income - Cash paid for purchase of raw materials & 31,763.40 Commission of social insurance 14,330.40 payment to suppliers Repair and service cost 20,407.55 Cash paid for utility expenses 79,065.43 Utility expense 42,188.95 Cash paid for fuel, petrol, spare parts and 4,990,339.99 transportation Labor safety cost 36,499.21 Other cash paid to suppliers 1,127,186.05 Business trip cost 9,338.87 Interest paid 54,908.47 Railway transportation cost 4,985,071.25 Taxes paid 12,302.37 Depreciation expense 178,982.38 Insurance expense paid 93.56 Security cost 38,388.00 Other - Post, communication cost 15,624.25 Cash flows provided by (used in) operat- (606,875.77) Fuel cost 54,488.13 ing activities Stationary cost 12,698.08 Cash flows of investing activities - Tax and insurance cost 28,432.46 Cash receipts from the disposal of fixed as- - Total operational and manage- - sets ment cost Received interest and dividend - Interest rate expense 54,908.47 Cash flows provided by (used in) investing - Exchange related income/cost - activities Other expenses 6,700.25 Cash flows of financing activities - Total operational expenses 5,628,705.49 Proceeds from issuance of shares 871,885.90 Major operational profit (loss) 173,559.39 Loan received from banks - Sub-operational profit (loss) - Cash disbursement for loan payments (251,984.10) Sub operating income (loss) - Financing received from the Government - Fines and discount income (3,922.88) (loss) Cash donation paid 5,000.00 Foreign currency exchange real (48,425.03) Cash interest and premium income 1,957.99 income (loss) Foreign currency exchange differences (623.36) Other (9,285.47) Cash flows provided by (used in) financ- 626,236.43 Total sub-operational profit (61,633.38) ing activities (loss) Net cash flows 19,360.65 Net profit before tax (loss) 111,926.01 Beginning balances of cash and cash equiva- 17,783.13 lents Income tax 16,009.50 Ending balances of cash and cash equiva- 37,143.78 Net profit after tax (loss) 95,916.51 lents

Note: Starting 2012, the Company’s financial reporting has adapted a new structure to enhance transparency with additional disclo- sure. Hence, the 2011 and 2012 figures in the income statement are not comparable.

Nick Cousyn Munkhtulga Ganbold Chief Operating Officer Head of Institutional Sales email: [email protected] email: [email protected]

Dagiijanchiv Chuluunbaatar Odbayar Oyunbaatar Undram Soyolkhuu Sainbayar Jadamba Research Research Research Institutional Sales email: [email protected] email: [email protected] email: [email protected] email: [email protected]

BDSec Headquarter BDSec Express Branch Zaluuchuud Avenue 27-1 Express Tower 8th Khoroo, Sukhbaatar District Peace Avenue Ulaanbaatar, Mongolia Ulaanbaatar, Mongolia Phone/Fax: 976-11313108 Phone/Fax: 976-11311128 Website: www.bdsec.mn Email: [email protected]

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