2017 06-10_LMwB_SuuReport

LMB ENTERPRISES, L.C.
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BEHARRY
CPO BOX-1509
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MONGOLIA
LAND:976-773-336-69
LYNDON MARTIN W.
BEHARRY
LMBEHARRY@YAHOO.COM
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Suu Joint Stock Company
From the herder’s farm to your home
Operating continuously since 1958, Suu JSC (Joint Stock Company) is
Mongolia’s dominant processor of raw milk to finished dairy products
including: milk varieties by fat grade, powdered milk, ice cream and premium
quality gelato products, cheeses, yogurts, and aaruul (a traditional item).
The Firm claims a sales market share of nearly 50 percent. It faces vigorous
rivalry in Mongolia. Within the past decade, APU, one of the nation’s dominant
brewers/distillers, engaged struggle against Suu in dairy. Vitafit Group, Teso
Group’s Milko, and Monfresh are Suu’s other major rivals. Suu JSC would also
face cannibalization within its own product lines; with new introductions
potentially filching customers away from its existing brands. The Firm is
actively seeking export market opportunities to sustain and grow revenue. Suu
commands loyalty, status, and excellent brand equity. These traits, in tandem
with its dominance in Mongolia, present excellent potential for sales abroad.
Max Group, a holding company with interests in supermarkets, logistics,
food/beverage, and mining/engineering, controls over 93 percent of Suu JSC
common equity, leaving just over 6 percent of 344 million shares to float on
the exchange. Because of this, share trade volume trends low, and the stock
has exhibited price consistency, with a Beta of only 0.262. If Max Group dilutes
float with future splits, the market would energize trade volume.
KEY FINANCIALS
1,000 ₮MNT (Except Per Share Values) 2014 2015 2016
Net Sales 38,770,645 39,442,562 41,842,641
% Change 15.70% 1.73% 6.08%
Net profit 2,828,699 557,169 502,727
% Change 21.52% -80.30% -9.77%
Depreciation / Amortization 1,641,687 2,241,892 2,898,210
EBIT Margin 5,304,880 2,593,280 2,363,407
EBIT Margin % Revenue 13.68% 6.57% 5.65%
EBITDA Margin 6,946,567 4,835,173 5,261,617
EBITDA Margin % Revenue 17.92% 12.26% 12.57%
Interest Expense 1,814,275 1,827,705 1,750,065
Interest % Revenue 4.68% 4.63% 4.18%
Times Interest Earned (EBIT:Interest) 2.92 1.42 1.35
Shares Outstanding 344 344 344,000
EPS 8222.96 1619.68 1.46
Avg Share Price (Undiluted Common)i 102877.50 99195.15 133.57
Avg Share Price (Dilution Adj) 102.88 99.20 133.57
P/E 12.51 61.24 91.40
Book Value Per Share (Dilution Adj) 59.93 76.92 70.09
P/BV (Diluted) 1.72 1.29 1.91
RoE 13.69% 2.10% 2.08%
RoA 6.06% 0.98% 0.99%
Market Capitalization 35,389,860 34,123,132 45,948,886
Total Debt 26,032,772 30,330,694 26,536,634
Cash and Equivalents 8,621,035 7,852,241 2,954,012
Enterprise Value 52,801,596 56,601,585 69,531,509
EV/Sales 1.36 1.44 1.66
EV/EBITDA 7.60 11.71 13.21
Current Ratio 1.79 1.46 0.77
Acid Test Ratio 0.01 0.01 0.01
Debt:Debt+Equity 0.56 0.53 0.52
Quick Take
Buy / Hold June 09, 2017
Current Market Price 124.77
Target Price 150
Growth Expectation >15.00%
Investment Period Long-term
STOCK INFO June 09, 2017
Sector Dairy
Market Capii
₮MNT 42.921 Billion
Net Debt (12/2016) ₮MNT 16.4891 Billion
Betaiii
0.262
52 Wk High/Low ₮MNT 154 / 122
Avg Daily Volume 1,935
Book Value (per share) ₮70.016
Ticker SUU
ISIN MN00SUU01355
INVESTOR CLASSES
INSTITUTION INVESTORS:
Max Group Holdings ≈ 93.605%
OTHERS IN THE MARKET:
Free Float ≈ 6.395%
Index Trend 2014 2015 2016
CAGR (2004-Year) 38.1% 32.3% 28.9%
Y-o-Y Growth -7.7% -13.8% -2.7%
1-Yr Chart

2017-06-09_LMwB_SuuReport | Page 2 of 25
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OVERVIEW OF THE BUSINESS STRUCTURE AND REPORTING: SUU JSC
Suu JSC is a joint-stock company incorporated under the commercial laws
of Mongolia’s Civil Code. Max Group, a privately held trading company,
controls the majority (93.605%) of Suu JSC equity interest (344 Million
Common Shares). Suu JSC publishes its financial information to the
Mongolian Stock Exchange in PDF and Excel formats.
ASSESSMENT OF REVENUE GROWTH (C. 2011-2017)
For a company entering middle age, Suu JSC has produced Sales growth
outpacing inflation (11.01%). From 2011 through 2016, Suu JSC achieved
a Compound Annual Growth Rate (CAGR) of 12.644%. But revenue growth
within the confines of Mongolia territory is limited by four main factors: a)
population; b) competition; c) regional preferences, and d) the limitations
of the transportation sector.
THREATS AND CHALLENGES
Competition
In the dairy sector, Suu JSC faces robust competition from local companies:
Apu Company, Vitafit, Teso, and MonFresh. And since Mongolia’s
population is so low, market saturation is an ever-present concern.
Product cannibalization is likely present; new product offerings or brands
may well steal customers from existing product lines. Finally, severe
weather may impact the viability of Mongolia’s cattle population. This
would diminish the Company’s ability to access fresh dairy for processing.
Long-Term Debt
Suu JSC carries a 9% coupon $USD 6 Million loan facility from a 2011 IFC
placement; principal is due in 2019. The firm has been servicing this debt
as the ₮MNT lost nearly 80% of its Foreign Exchange value over the past
five years. But with Mongolia’s macro-economy now embracing major
improvements, the analyst expects ₮MNT ForEx to recover. While macro-
economic resurgence alone may ease the Firm’s encumbrance, Suu may
also seek a debt consolidation to restructure its liability portfolio.
MAJOR ACCOMPLISHMENTS
In the years since Max Group took a controlling
interest (2005/2006), Suu JSC has made excellent
gains across the board. The Entity’s management
has built strong cross-border relationships to
acquire capital equipment and open doors for
future cross-border sales. In the twelve years
since 2005, the firm cites several commendable
results:
 2005- Automated ice cream production
line to produce and package 15 flavors
within the Dream brand;
 2006- Introduced the immensely popular
and high-volume PurePak milk line;
 2008- Introduced the TetraPak packaging
line for milk and juice;
 2009- Installed the EuroStandard line for
fruit yogurt;
 2011- Earned SAI ISO 9001-2008 quality
award;
 2012- Introduced the Amore ice cream
and gelato brand after installing Italian
capital equipment;
 2014- Introduced production of
Mongolian traditionally fermented yogurt
line;
 2014- Imported fresh cattle stock:
Holstein cows for Max Agro subsidiary,
Mongolia’s first integrated dairy farm;
 2015- Marked an annual milestone of
purchasing 13 million liters of milk from
Mongolia’s herders and dairy farmers;
 2015- Suu JSC controls 70 distinct brand
items; AND
 2016- Focused to enter export markets
with the introduction of its first of a kind
UHT milk, in a square Tetra Pak package.
Brands Products Target Market
Standard milk
Standard Plain Yogurt
General consumption
Minii Mongolian Suu
Got Milk?
Straw pack for children / young people
Drinking yogurt Health-conscious; young people on the go
Fruit yogurt
Health-conscious; young people on the go;
children; family market
Organic Butter General consumption
Premium Italiano Gelato High-end consumers; Professionals

Suu JSC
In 2017, Suu JSC is celebrating its 58th anniversary. During
the past ten years, Max Group, which owns the controlling
interest, has invested in modern capital equipment to
increase manufacturing efficiencies. Suu has also invested
in brand equity across different dairy market segments to
secure and maintain share in Mongolia’s highly
competitive dairy sector.
Tagging onto Mongolia’s cultural perspective that fresh
Mongolian cow milk, free-range meat, grain seeds, wheat,
flour, and drinking water are on the list of ‘strategic foods’
to support Mongolians’ physiological needs; Suu JSC
embraces community ideals for quality, service, and
environment. Suu JSC boasts modern European-standard
processing technology and environmentally-friendly
packaging.
With divisions strategically placed proximate to
independent dairy farmers, Suu JSC secures fresh raw milk
to process over 70 branded foods. In 2009, the Firm
established a curd and sour cream plant in Khentii aimag.
Engineered to produce a range of curd and sour cream
products at a daily ten ton milk throughput, the facility
collects raw material from 200 farmers in the eastern
region. The Company’s Erdenet facility, established in
2011, supplies dairy products to the western region.
Throughout the year, this division draws supply from
more than 600 independent farmers from ten areas in
Orkhon, Selenge, and Bulgan aimags. Every day, Erdenet
Milk processes 40 tons of dairy into over 30 product lines.
Overall, Suu commands the greatest milk resource
collecting 80% of fresh milk production from over 3,000
herders and farmers. The entity daily processes over 100
tons of fresh dairy. The company boasts the best
ingredients, expertise garnered from a half-century of
work and perfection in world-class processes, and a loyal
customer base that enjoys Mongolian grass-fed milk.
Having earned ISO 9001:2008 certificate from SAI Global
in 2011, the firm claims world renown for purity in
ingredients, stringent quality assurance systems, singular
quality, and unsurpassed nutrition content.
In mid-2017, the Company focuses on debt restructuring
and export potential. The Firm is eying the Japanese
market to boost revenue growth in the coming decade.
Mongolia, a Country of Dairy
Suu JSC’s Milk Factory
While the Company has engaged
in some vertical integration, Suu
sources the majority of its dairy
from a network of over 3,000
independent family dairy farmers
and herders. Free-range cattle
enjoy fresh grass loaded with
sunshine energy from The Land of
the Blue Sky.
Milk Tea
Mongolia’s traditional drink: boiled
milk, water, black tea, and salt. With
thousands of years of perfection, this
drink warms the body, replenishes
vital salts and minerals, and provides
a medium to chat with friends and
travelers – over цай and bread.
Some of Mongolia’s traditional milk
products: Milk tea, aaruul (yogurt
curds stiffened and sun-dried), and
urum (a rich creamy spread for
bread).
Yogurt: Tarag
The greatest courtesy: a cup of
yogurt to refresh and revitalize.
For after your return from a hard
daily work and commute, travel
through Mongolia’s expansive
countryside, or just anytime.
While the Mongolian nation presents a
vast and impressive land mass, sixty or
more percent of Mongolia’s sparse three
million population lives in Ulaanbaatar,
Tov (the central province), and the other
two major cities: Darkhan and Erdenet.
The country’s livestock is diversely
distributed, but still the majority of the
herd inhabits the Northern and Eastern
regions.
Paved road construction in the recent
decade has drastically improved
transportation times, but it still takes
several days to traverse the nation from
east to west.

FINANCIAL ANALYSIS
Historical Growth Rate: CAGR 12.644% 5-Yr ending 2016
For a mature entity, Suu JSC enjoyed excellent growth from
2011 through 2016. The Company hit over 12.6% CAGR in
revenue, while Costs of Sales rose by just under 11%
(approximating inflation) during the period.
This graphic displays DCF|NPV of Free-cash-flow to Equity,
sensitive to change in Weighted Average Cost of Capital.
These projections return a share price in line with current
market price. But as discussed below, the stock is poised for
a run once the Company engages export sales in earnest.
Projected Performance
This analysis uses a projected revenue growth rate of
12.50%. To sustain shareholder value and meet expectations
for RoE, the Firm must meet or exceed Mongolia’s historical
inflation rate. To achieve this growth, Suu must innovate
with attractive products and take share from its rivals.
Once Suu JSC achieves its potential and gains export
markets, revenue growth would logically spark. Mongolia’s
brand equity for dairy is a natural draw for sales abroad. As
Mongolia solidifies trade deals with Asian and European
buyers, logistics through China, and regulatory hurdles, Suu
JSC should rapidly improve sales.
Though rational business strategy avoids linking success and
failure with luck, Suu has experienced misfortune since
Mongolia’s economy began its four-year slump in 2013. Suu
has endured a cash drain from unfavorable (80% worse)
ForEx translation to pay $US Dollar denominated debt. But
once the Company conquers this onerous debt burden in
2019 (or refinances in ₮MNT at a more favorable ForEx rate),
Suu will experience a jolt in cash assets, priming it for
investment toward lucrative value-added product lines for
other export markets.
Because of these factors, the current share valuation of
₮MNT 125-130 range owns considerable upside potential;
and this is an investment opportunity one ought not miss.
RISKS AND POTENTIAL DOWNSIDE
Competition
Three principal dairy processors compete for Mongolia’s
dairy consumers: Suu JSC, Apu Company, and Vitafit.
Perhaps Apu Company is the most surprising competitor.
Apu’s long-standing trade had been in alcohol brewing and
distilling, but since 2006 it has aggressively pushed into the
dairy sector achieving sales market share of 19-20% by 2016.
Vitafit, sharing the Ulaanbaatar operations base with Suu
and Apu, commands 16% of Mongolia’s dairy sales. This
stringent competition among the principal players stresses
Suu JSC to simply maintain domestic market share; and long-
term growth in shareholder value must obtain from exports.
Weather / Climate
Parts of Central Asia’s landmass periodically suffer from
dry/drought conditions. To describe this phenomenon,
Mongolia uses the term: dzud. Dzud may arise during any
season; but it is particularly condemning in winter when
livestock herds are perpetually harassed by Mongolia’s sub-
Arctic-Siberian temperatures.
Mongolia suffered dzud conditions during the slaying
winters of 1999-2003. The weather culled over 11 million
animals from the national treasure; and dairy cattle were
among the worst affected. Herders labored years to
replenish the herds. Dzud conditions are particularly
debilitating to dairy because cows require three to four years
before entering their prime milk production. Compounding
this issue is the typically low yield from Mongolia’s dairy
cows. While European animals produce from 24 to 28 liters
of raw milk per animal-day, Mongolia’s national breed
generates only four to eight liters per day. Mongolia’s free-
range cattle produce excellent quality product, but good
things come in small amounts.
Note thedrastic decline in milk production starting in year 2000.The
ten-year moving average only started to show improvement in
2013-2014.

SIMILAR ENTITIES IN THE DAIRY SECTOR
The analyst reviewed a range of dairy companies to compare
financial performance. These companies: Suu, Apu, Mengniu,
Synutra, and Lifeway describe performance across a range of
geographical distribution and across a variety of capitalization
schemes.
Lifeway foods, based in Illinois in the USA, grew its fortune
producing and selling kefir (a fermented milk drink from Caucasus
in Eastern Europe). Synutra produces condensed-dehydrated dairy
and baby food formula. Mengniu is a leading China dairy producer
in Inner Mongolia. Suu andApu are based inUlaanbaatar Mongolia.
Notably, in 2016, most of these producers exhibited low Returns
on Equity. Because its Debt:Debt+Equity is so high, Synutra
returned 15% on Equity. But one suspects Synutra may have
problems servicing such onerous debt.
In the case of the Mongolian entities: Suu JSC and Apu Company,
both companies exhibit stressed cash-flow with similar RoE (
≈2.0%)and RoA ( ≈1.0%). But at the close of FY2016, Suu JSC
displayed extremely low liquidity ratio (Acid Test: 0.0125),
substantially lower than all of the other entities within this
comparison matrix. The American company, Lifeway, boasted the
most liquid balance sheet.
Suu and Apu each reflect a capitalization balance of about 50% debt
to 50% equity. Though Suu booked its foreign denominated debt to
₮MNT in 2011/2012 at a stronger ₮MNT ForEx rate. The debt
loading would be somewhat higher if adjusted to ₮MNT at today’s
foreign exchange regime.
Notwithstanding these companies’ wide range of financial
performance, the American Lifeway most certainly displays the
strongest financial ratios. The U.S. domiciled Synutra is highly
leveraged; presumably using debt to finance its production capital.
And among these five entities, the China domiciled Mengniu
posted negative earnings in FY2016.
With regard to the Mongolian dairy producers; Suu and Apu
struggle with foreign-denominated debt. This stresses their
cashflow and earnings potential. But appreciating ₮MNT will
alleviate this problem, and likely within the coming twelve to
eighteen months. And market ingress to Japan will stimulate
excellent growth for Suu’s near-term.
Suu dominates Mongolian dairy, commanding 48% of
Mongolia’s 2016 Dairy products sales. Apu was the closest
competitor at 23% followed by Vitafit and Teso Group. Notably,
since 2015, Teso lost 50% of its market presence to the leaders.
Within liquid milk sales, Suu JSC stands leagues ahead of the
competition with over 83% of total milk sales. While the
followers may nibble into Suu’s position, Apu, the closest
competitor, could hardly erode this dominance – especially as
Suu continues to market new brands and packaging, and novel
offerings for consumers in the region.
Mongolia
• Suu JSC (MSE: SUU)
• Apu Company (MSE: APU)
China
• Mengniu Dairy (SEHK-2319)
• Synutra (Nasdaq: SYUT)
United States
• Lifeway (Nasdaq: LWAY)

PORTER ANALYSIS IN BRIEF
Suu JSC Porter Analysis: Suppliers’ Power and Threats
Central Asia climate and Mongolia’s weather patterns pose the
greatest supply threat to Suu JSC. The terrible winter dzud
conditions of 1999-2002 decimated the nation’s livestock herds,
and nearly destroyed Mongolia’s dairy cow population. When such
an event happens in the future, Mongolia’s dairy processors will
face a rigorous test, potentially requiring import of raw milk from
Russia and China to simply maintain production and retain market
share. This particular threat would force processors to increase
operating costs, and require government subsidies to dairy farmers
of all sizes. But such events would also interrupt dairy processors’
growth plans for export potential, and may eradicate any foreign
market share.
Perhaps a prudent risk management approach could include: a)
backward vertical integration where the processor owns some
portion of livestock spread geographically with capital
infrastructure to house and protect livestock in inclement weather;
b) some type of insurance association among the firms competing
in the dairy business from which to draw down for such
catastrophic potential; c) purchase of livestock assets abroad in
China and Russia – to be kept abroad, reserved for import if/when
such weather events occur; d) maintain genetic diversity within
frozen stores for artificial insemination to restore genetic vitality
after such weather events
Suu JSC claims to control 80% of fresh liquid milk production and
sales through relationships with over 3000 herders and farmers.
Such bounteous connections suggest little danger of any individual
supplier posing any threat to the Company. Furthermore, Suu has
engaged vertical integration through subsidiary Max Agro. Suu has
stocked this wholly-owned milk source with Holstein dairy cattle.
Competitive Rivalry
Mongolia’s dairy processors engage competitive rivalry to grow and
maintain market share. Suu JSC has been the largest and most
entrenched dairy processor (48% in all dairy; 83% in liquid milk). APU
Company achieved over 20% market presence within the past five
years, eroding Teso’s sales share. Vitifit is active in this struggle holding
customers in the yogurt trade. MonFresh and the others struggle to
maintain the remaining 7%. Since all dairy processors rightly claim milk
sourced from organic origins, product differentiation falls upon
packaging and consumer perception of quality and elegance.
With regard to recent capitalinvestment, the market leaders haveeach
procured modern packaging and laboratory equipment within the past
5-7 years. Significantly, Suu, Apu, and Vitafit continue to acquire the
newest technology to grow efficiencies and quality of process. The
companies also seek European expertise to create additional value –
including refined cheeses and other quality items.
Marketing, packaging for portion size and elegance, and advertising
are significant factors toward gaining and maintaining sales share.
Other tools to differentiate the product: a) height level of the product
in the shop (i.e. children’s size milk/juice at child eye level); b)
European branding (i.e. Italiano-Gelato, etc.); c) products
differentiated on fat quantity (i.e. low-fat ice cream, frozen yogurt
desserts); d) affordable capital financing arrangements (the past five
years of Tugrik depreciation has wreaked havoc on entities who had
taken loans denominated in foreign hard currency); and e) niche
marketing catering to age groupings and social classes.
While MARKET SATURATION poses a small threat among the rivals, 2015
data show that Mongolia’s per capita milk consumption topped out at
23 liters per person; compared to a world average of nearly 57 liters
per annum, and an Asian average of 28 liters per person-year.
Nevertheless, population dynamics impose an ultimate ceiling to
growth in-country. Each person is able to consume only so much dairy
per annum. The best likely short-term focus is toward export of milk
powder and UHT dairy, and then export value-added product: cheese,
yogurt products, and other product lines.

Suu JSC Porter
Analysis: Buyers’
Power and Threats
Two levels of buyers:
Distributers and
Consumer.
Suu JSC, through Max
Group, presumably
has preferred access
to Max Group
Supermarket chains.
But the company likely
negotiates its
wholesale pricing with
other supermarket
chains. Each dairy
processor competes at
this wholesale pricing
level, so the larger
grocery chains tend to
have buyer power aiming to decrease the price at the
wholesale level.
Suu JSC would also compete with other processors for shelf
positioning, and the larger supermarket chains would also
influence this arrangement. Supermarkets typically assess
additional charge for shelf placement and other
advertisement within the supermarket itself. These
considerations could influence annual sales, particularly on
the higher-end product lines.
Smaller Mom and Pop shops would not pose any significant
buyer power to dictate wholesale price. But the consumer
also retains buyer power under a perception that one liter of
milk is as good as any other. Hence, many consumers may
shop for the lowest price milk (reverting to the wholesale
price offered to the supermarket chain).
Lactose Intolerance
Finally, there is medical evidence that adult Asian
populations exhibit a vastly higher frequency of lactose
intolerance than Europeans. This biochemical difference
underscores the question of potential growth in per capita
consumption among Asian dairy consumers. While individual
buyers may not command overt power over Suu JSC by
switching to a competitor; the data suggest a bona fide issue
of market saturation.
Scientific evidence shows that 95% of ethnic Asian (and
African) people decrease lactase (the enzyme which breaks
down lactose into simpler compounds to digest) as they age.
And as the leading chart shows, Asian dairy consumption is
far lower than in EU countries and in Australia-New Zealand.
But even still, Mongolia’s reported consumption of dairy lags
18 percent behind the Asian average.
Suu JSC Porter Analysis: Threat of Substitutes
There are no satisfactory substitutes for true dairy. Vegetarians
argue that soya products are acceptable stand-ins for milk, butter,
and potentially yogurt. But the vast majority of consumers would
not move away from true dairy products.
Suu JSC Porter Analysis: Barriers to Entry and Exit
The five significant barriers to entry: 1) Government Regulation;
2) Capital Investment; 3) Size/Growth of Market; 4) Access to
Dairy Farmers; 5) Access to Distribution Network.
Governments impose stringent regulation upon the food
processing business, with dairy pasteurization and processing
among the most highly regulated. This analysis has reviewed Suu
JSC competitors: notably Apu Company, Vitafit, Teso, MonFresh,
and Darkhan Khuns. Suu JSC in operation since 1958, MonFresh
since 1998, and Darkhan Khuns since early 1970s. Though Apu only
recently entered dairy in 2006, it had already gained institutional
knowledge in hygiene and preparation through its beer and vodka
business. Teso’s metric suggest the entity is losing share primarily
to Suu; but also to Apu and Vitafit.
Dairy processing requires hefty (by Mongolian standards) capital
investment in PPE to achieve economies of scale. Firms in the
sector must also build institutional knowledge in hygiene and
preparation. Finally, firms also seek to purchase intellectual
property, expertise, or proprietary organic matter (bacteria, etc.)
for specialty lines (cheeses, etc.) Prospective entrées must also
consider growing relationships both with independent dairy
farmers and herders; and also with distributers to the ultimate
consumer.
These principal players: Suu JSC, Apu, Vitafit, Teso Group,
MonFresh, and Darkhan Khuns will likely dominate Mongolia’s
dairy market with little chance of another player entering. But
because of Mongolia’s small population, it is possible that two from
among these players may find it prudent to consolidate. Ultimately,
the larger producers from among this group must seek export
potential to achieve sustained revenue growth.

FINANCIAL MODEL: PROSPECTIVE VIEW
Variables
CRITERIA
CoGS: F(Rev) 73.000%
Depreciation/Amortization (CoGS): F(Rev) 4.000%
SGA (Only) : F(Rev) 6.650%
R&D: F(Rev) 0.000%
Depreciation/Amortization (SGA): F(Rev) 0.000%
Other Expense (Income)/Overhead: F(Rev) 4.500%
Interest Expense (Income) : F(Rev) 4.000%
Tax Rate: F(EBT) 20.000%
Capital Expenditures: F(Rev) 5.000%
Working Capital: F(Rev) 2.000%
βeta 0.26234
Shares Outstanding 344,000
Inflation Rate 6.500%
RF (Mongolia Bond) Rate 15.870%
CAPM KE Calculationiv
18.733%
KB Result 14.649%
KB Result With Tax Shield 11.719%
WACC 14.648%
Market Historical Returns 26.784%
Revenue Growth Rate 12.50%
Perpetuity Growth Rate 6.500%
The analyst created prospective models and sensitivity
analyses to objectively determine Suu JSC valuations from
Free CashFlow to Equity (FCFE). By rigorously analyzing
the firm’s historical efficient financial performance, the
analyst derived costs and expense components as
objective functions of Revenue F(Rev), or in the case of
Taxation, F(EBT).
This table recounts the summary of variables used in the
Discounted Cash Flow analysis to isolate: 1) valuation of
the Firm’s Free CashFlow to Equity; and 2) valuation per
common equity share.
Discussion
The analyst produced three distinct prospective models of
FCFE: 1) Static model varying WACC; 2) Static model varying
Revenue Growth Rate; and 3) Dynamic multi-iterative Monte
Carlo model oscillating all variables within a tolerance of 10%
coefficient of variability. These models suggest a range of
Equity valuation for SUU JSC. The results page discusses the
outcomes of these Equity valuation simulations.
Costs of Capital
KE
Mongolia Stock Exchange Top 20 Index posted a recent
annual return (2016-2017) of 15.45%;v
with long-term
(12-year) CAGR of 25%. Valuing Suu, this analyst favors an
equity return of 18.733% following the Capital Asset
Pricing Model.vi
E(ri) = rf + β[E(rm)-rf]
= 15.870% + 0.26234 X (26.784%-15.870%)
= 15.870% + 2.8632%
= 18.733%
KB
CALCULATIONS TO ISOLATE KB ₮ 000’s
9% INTEREST ON $USD 6 MILLION LONG-TERM LOAN
Average 2016 ForEx Ratevii
₮2143.73
$1 USD
Estimate of Annual 9.00% Coupon on $6 Million $540,000
Estimate of Coupon at 2016 ₮ ForEx ₮1,157,614
FINANCIAL STATEMENT INFORMATION:
2016 Financing Costs from Q4 Income Statement ₮1,750,065
Current Due on Long-Term Debt on Balance Sheet ₮264,960
Est. Total Financing Costs ₮2,015,025
Est. Coupon for $USD IFC Debt at ₮ ForEx ₮1,157,614
∆ Between Financing Costs Less IFC USD Debt Cost
(The analyst believes this amount inures for MNT loans: Long-
term: ₮2,249,496 and short-term ₮7,692,003 (6 or fewer mos.).)
₮2,015,025
− ₮1,157,614
= ₮857,411
Book Value of Short-Term Loans: 2016 Q2 ₮5,693,013
Book Value of Short-Term Loans: 2016 Q4 ₮9,690,993
Average of Short-Term Loans Q2-Q4 ₮7,692,003
Book Value of Long-Term Debt ₮9,792,339
COST OF LONG-TERM AND SHORT-TERM DEBT:
Estimated KB Long-Term Debt =
₮1,502,848
₮9,792,339
15.347%
Estimate KB Short-Term Debtviii
Annualized compound rate assuming semi-annual
period = ��1 +
₮512,177
₮7,692,003
�
2
− 1�
13.760%
WEIGHTED AVERAGE COST OF DEBT AT Q4 2016 14.649%
ADJUSTED TO MONGOLIA 20% TAX SHIELD 11.719%
Weighted Average Cost of Capital
𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊ix =
𝐾𝐾 𝐵𝐵 𝐵𝐵+𝐾𝐾𝐸𝐸 𝐸𝐸
B+E
=
[11.719%X0.572]+[18.733%X0.423]
1.000
=
[0.06765] + [0.07919]
1.000
= 0.1468 = 14.684%
Discussion
In-country, Mongolian firms suffer exorbitant interest rates;
loans cost 1.7% per month and more. From the perspective
of a Mongolian entity, Suu JSC enjoys a sympathetic cost of
capital. But to compete with international publicly traded
dairy firms, Suu should pursue more lenient debt rates in the
international markets – provided the Firm is able to earn
hard currency to service debt.

STATIC MODEL: PROSPECTIVE VIEW
Results of the Variable Revenue Growth Rate
This display reflects per share valuations from a 7.50%
annual growth rate of revenue (per share ₮117.05) through
17.50% annual revenue growth (₮173.04). The Prospective
cash-flow analysis returned an expected per share valuation
of ₮139.68 at a 12.50% growth rate, with WACC of 14.684%.
Discussion
As discussed elsewhere in this paper, the analyst expects the
Firm must maintain revenue growth at a minimum of
Mongolia’s inflation rate: 6.50% with some true upside
potential. Suu JSC earned a 5-year CAGR above 12.6%, and
the analyst believes the Firm should sustain this measure of
growth into the future. But when the firm succeeds in
opening one or more export markets, the analyst expects
growth to hit the low 20% range.
Results of the Variable WACC Growth Rate
This chart plots Suu JSC valuations at different rates of capital
costs. The expected value per share is ₮139.68 at the
calculated WACC: 14.684%. Higher WACC returns lower per
share valuations.
Discussion
The analyst expects Suu JSC’s weighted average cost of
capital to be no less than 14.5%, but it may be higher. Thus,
the Firm would produce true value only through increased
growth in revenue, and through cost reduction.
MONTE CARLO FINANCIAL MODEL: PROSPECTIVE VIEW
Discussion
Monte Carlo is a statistics-mathematics process. It mimics real-
world volatility to probabilistically predict a range of outcomes. The
analyst employed the identical variable structure for both the static
and Monte Carlo equity valuation models. BUT, the Monte Carlo
process dynamically alters the factors within defined constraints.
In this instance, Monte Carlo uses the variables as the statistical
mean (arithmetic average), and fluctuated each factor 250,000
times at a standard deviation of 10% of the mean value.
Results
This chart illustrates a potential
range of valuation for SUU JSC
common equity per share at a
paltry 12.50% growth rate. Using
this variable structure, the model
delivers the following statistics: a)
an expected median per share price
of ₮154.08; with a b) projected
maximum to ₮570. At a base 12.5%
revenue growth rate, the
simulation returned a 61.00%
probability of a fair valuation of
over ₮130 per share.
Discussion
The analyst sculpts scenarios with cautious estimates, aiming to err
on the side of restraint. This Monte Carlo prospective model uses
conservative estimates for growth and cost/expense factors:
growth rate approximating Mongolia’s historical inflation; costs
following historical mean percentages, tempered against industry
norms.
But when SUU JSC connects with export distribution channels,
revenue growth rates may well rise to over 20% for a half-decade
or greater. Though this potential is captured within the Monte
Carlo model, the conservative parameters pull valuation potentials
back toward the mean. And while this particular model only returns
a 13.62% probability of per share equity warranting values greater
than ₮250, the region of 25% growth is well within the realm of
possibility when Suu begins export. The static model sensitivity
analysis predicts a per share value of over ₮200 at 20% Revenue
growth. And one must also consider how a strengthening ₮MNT,
debt restructuring, and new product lines will buttress Suu cash
position and increase shareholder value.
SUU MONTE CARLO12.50%:
VALUATION PER SHARE
CURVE SHAPE Weibull
TRIALS 250,000
MEAN 155.71
MEDIAN 154.08
MODE 0.00
ST DEV 84.414
MINIMUM 0.00
MAXIMUM 569.74
VALUE >₮130 61.00%
VALUE >₮200 29.94%
VALUE >₮250 13.62%
VALUE >₮500 0.006%

1) Cost of Sales dominates ultimate production of
Shareholder Value and Returns on Equity.
Businesses have recognized this truth since
humanity’s early ancestors debated whether to
hunt every day (including unhealthy hot days), or to
gather on some days and expense hunting assets
(experience, training, and energy) only within
profitable conditions.
2) In ART OF WAR, Sun Tsu ordered the army to gain its
sustenance off the enemy’s land. In other words,
neither the troops nor the generals should reap any
excessive rewards unless and until the Firm gains
authority over Revenue in the target market. In the
case of Suu JSC, the firm should manage its back-
office payroll and executive bonus structures until
the firm earns success in export earnings.
3) Certainly, Suu JSC must invest in capital
infrastructure and with foresight. Suu must tightly
control its investment in capital infrastructure, and
safely squeeze additional years from equipment. In
addition, the firm may wish to create an internal
R&D department. While R&D is a cost center that
bills expense to production; over years, R&D may
well engender significant shareholder value in new
product lines.
4) Suu suffers from exorbitant interest payments. But
for comparison, reckon how the financials would
appear today if the Entity had been able to float a
debenture at 5% instead of 9% for $6 Million USD.
-Bad Luck on the timing, securing a 9% cross-
currency loan precisely just before Mongolia’s
macro-economic collapse and the relative collapse
of the nation’s currency in ForEx.
<><><><>
Tugrik Appreciation
At present and into the near-term, Mongolian
Tugrik appreciation presents an opportunity as
₮MNT is set for a firm recovery with a new optimism
of Mongolia’s golden potential. The analyst expects
₮MNT to appreciate vis-à-vis $USD. And by 2019 this
eventuality presents re-finance and debt/liability
consolidation opportunities for Suu JSC.
The Firm may well find itself easing into
extraordinarily favorable financing terms as the
Tugrik appreciates, with the Mongolian nation
gaining ascendancy as the go-to locus for economic
growth and returns on capital investment in Central
Asia.
Sensitivity Analysis
The Monte Carlo FCFEDISCOUNTED CASH FLOW PROJECTION is sensitive to particular conditions: 1) Because the perpetuity CashFlow dwarfs
estimated cash-
flow in any given
annum, the
terminal year COST
OF GOODS SOLD
typically asserts
dominance over
the Firm and its
weighted Equity
valuation; 2) 2017
SGA (i.e. Monte
Carlo advocates
frugality for back
office salaries and
bonuses:); 3) 2017
CAPITAL
EXPENDITURES (the
firm must be
efficient in its
capital
expenditures); 4)
2017 WORKING
CAPITAL (reign in liabilities as a function of current assets); and 5) OTHER EXPENSE and 6) INTEREST EXPENSE (Suu is in the Mongolia dairy
processing business; it ought not frequently go trouncing around in unfavorable foreign exchange financing – until it gains export
market share where it is able to earn hard currency to finance hard currency capital costs. Debilitating ForEx rates underline the major
problems within these two cost drivers: “5)” and “6)”). -Mongolian business has learned a valuable lesson regarding high finance and
hard currency.

FRAUD ANALYSIS
Statistics Testing for Anomalous Financial Reporting
Benford’s Test
Beneish M-Score
METHODOLOGY OF FORENSIC ANALYSIS TO DETECT FRAUD
Twenty-first century forensic analysis of financial
records encourages mathematics and statistics to
test anomalies in financial reporting. The analyst
favors two forensic tests: Benford’s Test, and
Beneish’s M-Score. Note: Forensic Accounting
analysis cannot prove fraud; it simply suggests
instances of potential anomalies in reporting.
Benford’s (First Digits) Law
Benford’s law (First Digits Law) predicts that the
first digits in random sets of numbers which span
across several orders of magnitude (i.e. ones, tens,
hundreds, thousands, etc.) will conform to a set
distribution (the chart red line). Because of
compounding over time intervals, the First Digits
rule affirms that there are more instances of
numbers beginning with 1, then 2, then 3, and so
on.
This analysis tested Suu JSC Balance Sheet numbers
against Benford’s Law. The first digits of the
Balance Sheet numbers fall very close to expected
outcomes; and the analyst believes this indicates
fair and honest reporting.
The Beneish M-Score calculations
Since Max Group took its majority shareholder
position, Suu JSC has been vibrantly restructuring
its capital equipment, its biological assets, its
branded lines, and its vertical integration. The
Beneish score reveals an anomalous Asset Quality
Index FY2013-FY2014. While AQI may suggest a
cost deferral, in this particular instance the values
are skewed due to a large ₮MNT6 Billion
investment in PPE in 2014, coupled with a
₮MNT2.2 Billion Asset booked as Valuation
Allowance. By 2016, Suu booked a ₮MNT20.2
Billion investment in livestock for JSC subsidiary,
Max Agro Group. These capital expenditures seem
to account for the extraordinarily high index scores
in 2014 (AQI: 53.19) and 2016 (AQI: 4.57) during
these time intervals.

OUTLOOK AND RECOMMENDATION
This analyst proposes an optimistic view for Suu JSC
growth prospects. Max Group, the Firm’s dominant
shareholder, his exhibited leadership, and has typically
seized first mover advantage. Faced with rigorous
competition in the domestic market, Suu is positioning
itself for export.
Success in export produces two significant windfalls for
the company: 1) Greenfield territory to grow Mongolian
brand equity to increase overall revenue; and 2) a source
of hard currency to balance against future foreign debt
facilities. Whenever the firm again engages foreign-
denominated debt, Suu should have a foreign bank
account from which to balance off fluctuations in ₮MNT
Foreign Exchange.
As with all Mongolian food processors, Suu JSC must lobby
and work with Mongolia’s government to continually
apply international food regulatory standards to grow its
international brand equity as a quality supplier.
The firm must also work to mitigate supply risks through
vertical integration. But this is particularly challenging. On
the one hand, if the Firm owns and operates large dairy
processing farms, it gains more control over its supply
source. But on the other hand, Suu would lose something
of a perception of quality.
Part of the mystique of Mongolia dairy is free-range dairy
cows milked by hundreds of small independent herders
and dairy farm families. If the Firm moves away from this
long-standing image, it stands to decrease its own brand
equity. There is a middle ground, though: contingency
plans for future dzud conditions incorporating
independent herders and their livestock. In other words,
Suu may not wish to completely control its supply chain.
But it could partner up with independent suppliers to
provide sheltering and assistance for livestock during
future potential natural weather phenomenon. -This
requires foresight, investment into some sheltering and
water-source infrastructure, and monitoring.
This analyst posts a strong BUY recommendation for
the Company. Suu JSC is the long-standing leader of
Mongolia’s dairy industry. It boasts a breadth of
branded products, a well-honed family values image,
and growth potential through one or more export
markets. Furthermore, as ₮MNT gains vis-à-vis
foreign currency, the Firm will achieve greater ease
servicing its debts costs, and improve its free-cash-
flow.
Will the stock run-up? If the investor watches the
Mongolian Stock Exchange, look out for these
signals:
a) Suu JSC splits current float or completes a
shelf offering introducing new Common
shares for trade. A little extra float in the
market may excite trading activity.
b) Appreciating ₮MNT. As Tugrik gains strength,
the Entity will enjoy greater ease purchasing
$USD to service $US dollar denominated
debt. This will tend to increase liquidity and
ultimately, grow earnings per share.
c) Press releases concerning contracts with
foreign (particularly Japan and Korea)
distributers. And potentially…
d) Future growth through consolidation and
reduction of redundancies in the market.
Enjoy your investments!
And remember…
It's not the size of the dog in the fight, it's the
size of the fight in the dog. …Mark Twain

FINANCIAL INDICES

FINANCIAL INDICES
i
Suu JSC split its stock 1000:1 in late 2016. These prices are not adjusted for dilution.
ii
The analyst adjusted capitalization to account for Treasury Stock.
iii
The analyst calculated the beta (May 5, 2016 – May 5, 2017): [Covariance of the past 365-days daily change in returns of stock price to the MSE-20 Index
change in daily returns] ÷[Variance of the past 365-days daily change in returns of the stock price]
iv
The analyst performed CAGR analysis on the Mongolian Stock Exchange annual returns (Top 20) from January 2005 through May 2017 and determined that the
Compound Annual Growth Rate has been roughly 25%. (Mongolian Stock Exchange, 2017)
v
Bloomberg Markets hosts the data: https://www.bloomberg.com/quote/MSETOP:IND (Bloomberg Markets, 2017) The CAPM Model: E(ri) = rf + β[E(rm)-rf]
vi
The analyst performed CAGR analysis on the Mongolian Stock Exchange annual returns (Top 20) from January 2005 through May 2017 and determined that the
Compound Annual Growth Rate has been roughly 25%. (Mongolian Stock Exchange, 2017)
vii
QuandL ForEx Data (QuandL.com, 2017):
12/31/15 01/31/16 02/29/16 03/31/16 04/30/16 05/31/16 06/30/16 07/31/16 08/31/16 09/30/16 10/31/16 11/30/16 12/31/16
1989.95 1998.94 2026.1 2045 2012 1993.5 1973 2060 2197 2278 2359 2455 2481
viii
This assumes a semi-annual term to cover short-term loans.
ix
Capitalization Weights:
000s 2016
Long-Term Debt 9,792,339
2011 $USD IFC Loan 6,000
Est. 2011 ForEx Rate [2011-Apr - 2011-Dec] 1,257
Est. ₮MNT Value of 2011 Loan in 2011 7,542,843
Book Value of Other Long-term 2,249,496
Avg. ForEx Rate 2016-Jun - 2017-Jun 2,322
Est. ₮MNT Value of 2011 Loan at 2016-2017 13,931,687
Long-Term Debt Capital (Adj. for ForEx) 16,181,183
Adjusted Debt:Debt+Equity 57.724%
Adjusted Equity:Debt+Equity 42.276%
KB Weighted Cost of Debt (Tax Shield) 0.11719139
KE CAPM 0.187332133
KB Component 0.067648065
KE Component 0.079195722
Weighted Average Cost of Capital 0.146843787

2017 06-10_LMwB_SuuReport

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2017 06-10_LMwB_SuuReport