CFA RC Team-Eternals UFE Mongolia-1

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Team Eternals-University of Finance and Economics
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UNIVERSITY OF FINANCE
AND ECONOMICS
TICKER: GOV MONGOLIA | MONGOLIAN STOCK EXCHANGE (MSE)

GICS: CONSUMER DISCRETIONARY DATE: 01/28/2022
INDUSTRY: APPAREL RECOMMENDATION: SELL (18.4% DOWNSIDE)
CURRENT PRICE: MNT 333.5 AS OF NOVEMBER 26, 2021 TARGET PRICE: MNT 272.18
GOV’S OVERVIEW INVESTMENT SUMMARY

Recommendation SELL
Ticker GOV We suggest a SELL recommendation on GOBI JSC with a 12-month target price of MNT
Shares outstanding 780’112’500 272.18, an 18.4% decrease from GOV's closing price of MNT 333.51 on November 26,
Market cap [MNT] 254,893,958,250 2021, using valuation methods such as Discounted Cash Flow to Firm (70%) and
Market cap [USD] 89,458,449 Relative Valuation (30%) models. Furthermore, the residual income model supplements
52 week low [MNT] 198.7 our valuation in order to obtain a more accurate view of the stock price. In our
52 week high [MNT] 393.6 perspective, the key factors that will negatively affect the Gobi’s near future are (1)
Closing price [MNT] 333.5 Difficulties faced in expanding into overseas (2) Inconsistent long-term strategy (3)
Target price [MNT] 272.18 Unhealthy financial position makes the company vulnerable.
Downside % 18.4%
(1) Difficulties in expanding into overseas markets
Source: MSE, Team estimates
Gobi is an indisputable leader in the domestic cashmere garment sector with an 83%
market share, making expansion into new markets the sole option for considerable
FIGURE 1: SHARE PRICE PERFORMANCE
future growth. As Gobi seeks to strengthen its position and to scale in the global
400
market, they have made massive marketing, growth-related capital expenditures in
300 recent years. In particular, Gobi puts a lot of effort into its e-commerce as an option to
enter new markets, therefore, the majority of the spending is directed toward website
200
development and online advertisements. However, online stores are a much more
100 suitable model for the markets that are familiar with the company’s products. In new
markets, the need to physically touch and feel the clothing products in-store are
0
1/2/2007 1/2/2011 1/2/2015 1/2/2019 essential for customers to determine the quality of newly introduced cashmere
Source: MSE products. Yet regardless of the necessity of traditional stores, Gobi’s international store
number has significantly dropped, from 4 branches and 53 franchises in 2019 to 1
FIGURE 2: STORE NUMBERS AND SALES branch and 24 franchise stores in 2020. Thus, the company’s expansive investments
GROWTH
80
that are oriented to new markets are not guaranteed to provide adequate return. In
40%
essence, Gobi's choice of e-commerce as its core penetration approach to overseas
60 20%
0%
markets and the current Covid-19 pandemic impact on tourism and logistics are posing
40 -20% challenges to expand its business internationally.
20
-40%
-60%
[2] Inconsistent long-term strategy
- -80% Vertical integration is a core competence of Gobi. But with poor planning and
2017A 2018A 2019A 2020A
insufficient market research, which led to overproduction, the company is left with a
Online store
Traditional retail store huge amount of surplus inventory. Despite the complete control over its resources and
Domestic sales growth manufacturing process, Gobi’s average inventory days was 572 days in the last five
International sales growth
Source: Company data, Team estimates

years, which is about 4 times higher than the industry average. Such superfluous
inventory brings about the risk of quality degradation, model lag of leftover products,
inefficiency in the current operation and adverse effects on the company’s liquidity. We
FIGURE 3: INVENTORY AND SALES
GROWTH RATE
believe that the cause of this problem is the inconsistency in Gobi’s long-term strategy.
50% The frequent changes in the executive management team between 2017 and 2020,
200,000
making it difficult to implement long-term strategy. For instance, the company has
20%
been adding up the number of retail stores in the international market in the years
100,000
-10%
between 2016 and 2018, but started boosting e-commerce strategy and closing up its
-40% traditional stores in 2019. Hence, being unable to adhere to a long-term stable strategic
0 -70%
plan is holding back the company from operating more efficiently and profitably.
2016A 2017A 2018A 2019A 2020A
Inventories (In Million MNT) Sales
[3] Unhealthy financial position makes the company vulnerable
Source: Company data
The company's anomalous short-term debt, excess inventory, superfluous marketing
expense, decreased shareholders equity, and poor cash flow make it less appealing to
investors. GOV's short-term debt has historically been expanded (at a CAGR of 59.2%
FIGURE 4: ROE AND D/E RATIO from 2015 to 2020) to invest in capital and marketing, but these financial obligations
16 80% are currently causing an enormous amount of interest expense (25.23% of total
12
40% revenue) and putting the company under pressure. In previous years, the company had
0% extensively invested in its expansion strategy, but the pandemic caused a significant
8
-40% drop in revenue (-44.17% from 2019 to 2020). Now the increased expenses are pulling
4
-80% down the retained earnings(decreased 45% from 2018 to 2020) and reducing
0 -120% shareholder returns(EPS is decreased from 18.81% 2016A to -70.7% 2020A). High debt
service amplified by lower revenues and profits is making the company experience a
D/E ratio ROE persistent burden of heavy cash outflows. We expect the unhealthy financial situation
Source: Company data, Team estimates to not improve in TTM.
UNIVERSITY OF FINANCE AND ECONOMICS 1

FIGURE 5 : REVENUES BY PRODUCT LINE
BUSINESS DESCRIPTION
10%
Gobi JSC is a cashmere goods manufacturer, located in Ulaanbaatar, Mongolia. Gobi
21%
Knitwear
was established in 1981 as a government-owned company, then became a public
Sewn company with private owners in 2007. Gobi's strengths are its brand reputation
Woven domestically and its low-cost, quality products as a result of a vertically integrated
69%
value chain. The company is one of the few Mongolian apparel companies that exports
its products to foreign markets; its products are distributed globally through
subsidiaries in the United States, Germany, and China.
Business model
FIGURE 6 : REVENUE BY GEOGRAPHY
Gobi JSC generates revenue by processing raw cashmere and selling it as three types
32% 18%
of products: knitwear products generate 69% of sales followed by sewn products (21%)
and woven products (10%) [Figure 5]. With the assistance of its vertically integrated
supply chain, the company is striving to be the best cost provider in the industry. Gobi
has a hybrid business model that combines brick-and-mortar, internet retailing, as well
as franchise stores. The company targets 6 different types of customers through its
6%
differentiated brands in the domestic market and the brands are united under the name
of Gobi in the international market [Appendix B-3]. Gobi is classed as a mature company
42%
2% based on our life-cycle analysis.
TABLE 1: COMPANY LIFE-CYCLE ANALYSIS
Source: Company data Stage in life-cycle Start-up Growth Mature
Financial management
Revenue growth Beginning Rising Slowing
FIGURE 7: NUMBER OF STORES BY ITS Cash flow Negative Improving Positive/Predictable
TYPE
15 80 Business risk High Medium Low
Debt capital/Leverage
60 Availability Very limited Limited/Improving High
10 Cost High Medium Low
40 Typical cases N/A Secured/by receivables and fixed assets/ Unsecured/Bank and public debt/
Typical % of capital structure Close to 0% 0%-20% 20% +
5
20 Source: CFA Institute, Team estimates Both International Domestic
- - Geographic Reach
2016 2017 2018 2019 2020 2021
Franchise store
As one of the five biggest cashmere goods manufacturers in the world, Gobi JSC sells
Domestic store its products in many countries around the world [Figure 6] with 42% of its revenues
Total traditional retail store coming from the domestic market, 32% from EMEA, 18% from APAC and 6% from
Branch store Americas and the rest of the revenue from other regions in 2020. Currently, the
Online store
company operates 24 franchise stores and one branch in 19 cities across 8 countries.
Company Strategy
FIGURE 8: PRODUCTION CAPACITY BY
PRODUCT LINES AND UTILIZATION RATE
Key competitive strategy
1,600,000 80%
The company’s main strategy is to become an internationally recognized and
competitive cashmere brand. Gobi has 2 core strategies: [1] to compete by utilizing low
1,200,000 60% labor costs and vertical integration, which provides the company with exceptional cost-
efficiency in comparison to its industry competitors, [2] to differentiate its products by
800,000 40%
enhancing the design and the quality of them for efforts as a competitive advantage.
400,000 20% Gobi targets three distinct sub-markets to become globally competitive: B2B
manufacturing cashmere goods by orders from other businesses, B2C selling products
0
2016A 2017A 2018A 2019A 2020A
0% through all types of retail stores, and D2C using the brand's own website as an online
Knitted product (pcs)
sales channel.
Woven product (pcs) Actions taken to changing macroenvironment
Coats and jacket (pcs)
Utilization rate Since a substantial portion (around 50%) of the company's domestic revenues come
Apparel industry capacity utilization rate
Source: Company data, NASDAQ data
from tourist purchases, travel restrictions caused Gobi to experience a 44% decline in
revenues in 2020. Thus, the company saw its three-year-old e-commerce as a
potential solution. Gobi's subsidiaries in three regions, its warehouse and website are
FIGURE 9: SALES CHANNELS AND
REVENUE GROWTH RATE the fundamentals in the company's successful triple of online sales (from MNT 9.6
billion in 2019A to MNT 31.6 billion in 2020A)[Figure 9]. Pandemic has pushed the
160,000 80%
company to speed up the improvement of its e-commerce. However, brick-and-mortar
120,000 40% stores play a more important role in introducing cashmere products to new markets,
80,000 0% therefore, e-commerce can not adequately compensate for the losses of other sales
channels. We believe that, in a long-term strategy, it is appropriate to encourage online
40,000 -40%
shopping to support its traditional stores.
0 -80%
2016A 2017A 2018A 2019A 2020A Expanding into new foreign markets
Domestic sales Gobi’s effort to expand its operation to new markets has been present for a while. They
International Sales
Online sales began entering the international market in 2016, and by 2018, they had 61 franchise
Revenue growth rate stores and five branches. While they are currently collaborating with Ogilvy in European

FIGURE 10: REVENUE, S&M EXPENSE
AND CAPEX GROWTH RATE and American regions for their worldwide branding, they have significantly increased
200% their marketing and sales expenses year by year since 2016 (from MNT 8.1 billion in
150% 2016A to MNT 44.3 billion in 2020A) [Figure 10]. To take advantage of economies of
scale, they have also been preparing for the projected increased international demand
100%
by expanding their manufacturing capacity [Figure 8]. Unfortunately, the company
50%
could not utilize the enlarged capacity (the capacity utilization rate decreased to 46%
0% from 59%) due to insufficient demand. Additionally, the pandemic impact exacerbated
2017A 2018A 2019A 2020A
-50%
the situation for the Gobi In 2020, resulting in a substantial decline in the number of
overseas stores.
Revenue
Acquisition of GOYO
Selling & Marketing
expense In 2019, Gobi JSC made acquisitions of all shares of Goyo LLC, which was the second-
CapEx
largest company with a market share of 13.6% domestically. MNT 37 billion was invested
in total for the acquisition. Key objectives of this acquisition were: 1) Market share
growth: in the next year after the acquisition, Gobi , who had a market share of 71.3% in
2018, reported that their market share had expanded to 83%. 2) Acquiring the know-
FIGURE 11: OWNERSHIP STRUCTURE
how of their design and manufacturing to attract young adults. 3) Capacity expansion:
According to Gobi’s plan to grow, additional factory capacity was required for future
100%
16% 16% 16% 16% 16%
production. Thus production equipment that comes with GOYO was another reason for
75%
6%
29% 29%
this action.
29% 34% 34%
50%
34% 34%
ENVIRONMENTAL, SOCIAL AND GOVERNANCE
34%
25% 50% 50%
16% 22% 22% Gobi JSC has a high reputation as one of the largest firms in Mongolian agriculture
0%
2016 2017 2018 2019 2020
industry. But the agriculture industry is expected to face strong social and
environmental influences throughout the following years due to the rise of organic,
Tavanbogd Trade LLC Hide Inter LLC cruelty-free and vegan attitudes around the world. Therefore, the company’s initiatives
FCI LLC Ulemj Ikh LLC towards the environment and society will be taken more seriously over time. For
Free Float environmental and social assessment, we adhered to “Key Sustainability Factors For
ESG Evaluations of Consumer Goods” by S&P Global. As a consequence, we are
convinced that Gobi’s social and environment-oriented activities were not enough as a
massive manufacturer. On the other hand, the company’s governance is relatively well
FIGURE 12 : ESG SCORECARD structured with adequate divisions and tiers of the board, protecting shareholders'
rights by the company’s policies, even though the executive management team is
Score Weightings
inconsistent. Hence, we estimated an overall score of 2.73/4 for Gobi JSC’s ESG
Environmental 2.2 23.2%
evaluation using the weights [Figure 12] provided by “ESG Industry Materiality Map”
Social 2.6 41.5% from MSCI.
Governance 3.23 35.3%
Environment
Overall score 2.73 100% Cashmere is an integral part of Gobi’s business operation which belongs to an industry
Source: MSCI, Team estimates
that produces huge amounts of greenhouse gas and has a significant effect on climate
change. One of the main concerns is that cashmere goats have a notable contribution
to the rangeland degeneration, overgrazing, because 90% of Mongolia is made up of
FIGURE 13 : GENDER RATIO
drylands that, if not maintained, might turn into deserts. As aware of this situation, Gobi
JSC has been funding and implementing the Sustainable Cashmere Project since 2018
71% with the partnership of Sustainable Fibre Alliance using environment-friendly cloth
bags and creating a brand collaborating with herders who restrain the number of goats
of Total
employees to prevent possible dangers to rangeland. However, we believe that these activities do
not outweigh the adverse effects of its operation on the environment such as
55% droughting water usage, greenhouse and carbon emission [Appendix D-3]. Gobi does
not compute the most climate-impacting factors produced by its operation and did not
of Board of
Directors report any future plans for such concerns while its peers already started implementing
strategies to operate environmentally friendly.
53% Social
of Executive
For CSR purposes, Gobi has made contracts with over 25 thousand herder households
management
team 29% to sustain their livelihoods and donates 1,000 MNT of every cashmere coat and jacket
of Total
employees
sales for the welfare of society. And the company makes effective use of new
technological advances, such as social media, website, e-mail, etc, to engage with
customers. However, the company has an unbalanced female gender ratio of 71%
45% [Figure 13] owing to the industry's distinctiveness and we suppose that the
of Board of commitments to social responsibility are not enough as a massive manufacturer which
Directors
utilizes an abundant amount of workforce [Appendix D-2]. In the last 2 years, the
47% number of employees has substantially reduced by 42% as the company faced financial
and operational difficulties caused by the pandemic. In terms of safety management,
of Executive
management the company has some bad records, such as a fire breakout in 2017 and a tragic
team
industrial accident in 2019, indicating inadequate implementation of the Occupational
Health and Safety management system ISO 45001:2018 standard.

FIGURE 14 : GOVERNMENT STRUCTURE
Governance
We assessed Gobi JSC’s governance based on performance, transparency and
structures of its administration units including executive management, the board of
directors, and shareholders. We assigned a moderate score of 3.23/4 to the governance
of the company. The company's administration consists of two-tier BoD, separating
management and supervisory boards [Figure 14], and complies with the Company Law
as well as the Mongolian Corporate Governance Code. The board of directors has 9
members, divided into Nominee, Risk and Audit, Remuneration committees, with a fairly
balanced gender ratio. Each committee, which involves 3 members of the board, is
headed by an independent member and is in charge of its section. The independence of
the board is excellent since the independent members constitute the majority of the
board. Nevertheless, as we see, the policies and activities of the committees are not
properly conducted [Appendix D-1]. Executive management comprises 15 members,
53% of which are female, the management team is highly educated and experienced in
the field. The executive managers change frequently which indicates that the
company's management team is not stable and not tied to the long-term strategic
plan. Although the compensation policy of the executives is not publicly available, it can
be seen that executives’ compensation is not linked with the company’s performance
FIGURE 15 : PCE ANNUAL GROWTH
based on the remuneration reported by the company. Improperly compensated
15% executives may not have the incentive to perform in the best interest of shareholders,
which can be costly for those shareholders.
10%
INDUSTRY OVERVIEW
5%
0%
Gobi belongs to the consumer discretionary sector and apparel industry. The global
2018A 2019A 2020A 2021E 2022F 2023F apparel industry heavily relies on physical capacity and has mature characteristics due
-5% to its one-digit growth for the past decade. According to Mckinsey's State of Fashion
2022, Global non-luxury fashion sales are expected to grow 5% at maximum in 2022,
-10%
Mongolia
while the Asian apparel industry is expected to grow 2% more. Its surviving players have
USA both brand loyalty and economies of scale which creates significant barriers for new
Euro area
China
entrants like Gobi to grow. Thus, we believe that it would be difficult for Gobi to
compete and grow in the global cashmere apparel industry.
Source: World bank, Deloitte, European Union
Demand drivers
In the past 2 years, demand for cashmere goods has been seriously impacted by Covid-
FIGURE 16 : RECOVERY OF AIR TRAFFIC 19 lockdowns. Thus sales of the company are likely to be defined by global economic
FLOWS , INDEX [2019=100]
recovery, tourist traffic, and e-commerce conditions in the upcoming post-pandemic
years.
2023 Private consumption is going to return to its normal level
During the Covid-19 pandemic, private consumption diminished tremendously, meaning
that consumers were unlikely to spend money on secondary needs. Households savings
2022
and unemployment rates around the globe, which have strong negative correlations
with private consumption, significantly increased. To be specific, the household savings
rate peaked at 12.82% from its pre-pandemic level of 5.95% along with the
unemployment rate to 7.14% according to OECD [Figure 17]. However, the sudden
2021
outcome is deemed to revert to its normal level in the upcoming years [Figure 15 & 17].
For this reason, we are convinced that private consumption around the world will
0 25 50 75 100
experience strong growth in the near future, recovering from the pandemic situation.
Asia-North America Asia-europe Intra asia This revival will help Gobi to regain its lost revenue.
Source: McKinsey’s State of Fashion 2022 Tourism is unlikely to recover quickly
Tourist purchases account for 49% of domestic sales; hence, a significant drop in the
FIGURE 17: UNEMPLOYMENT AND number of tourists as a result of the pandemic has tremendously declined the
HOUSEHOLD SAVINGS RATE FORECAST
company's revenues. Unfortunately, international travel is not likely to fully rebound
15% until 2023-2024 [Figure 16]. Specifically, Inter-regional travel flows are expected to
recover only half of 2019’s flow in 2022. If this happens, the company's domestic sales,
10% which diminished by 63.28% in 2020, are not going to heal enough in 2022. This
enormous factor, tourist traffic, is unlikely to sustain Gobi’s profitability.
5%
E-commerce industry
0% Gobi JSC entered e-commerce during the pandemic since it certainly was the solution
2017A 2018A 2019A 2020A 2021E 2022F 2023F
to lockdown for physical retail sales. The E-commerce industry is currently entering its
World households savings rate shakeout stage after its enormous 50% YoY growth in 2019-2020 and is expected to
World unemployment rate grow at a CAGR of 16% in 2022-24 [Figure 18]. For companies planning to grow by e-
Source: OECD data
commerce such as Gobi, the direct to customers (D2C) strategy provides

more potential opportunity compared to using third party e-commerce due to the
FIGURE 18: E-COMMERCE AND RETAIL
SALES GROWTH
collectable customer data for modifying their products based on consumer
preferences. Online sales have tripled in 2020 as a consequence of the online initiatives
60%
[Figure 9]. This indicates that if the company successfully adjusts to the new e-
commerce business model that they have been planning since 2017, net profits will not
40% suffer as they did in the first year of the pandemic.
Supply drivers
20%
The supply of raw cashmere is expected to remain stable.
In 2020, Mongolia officially registered 27.7 million heads of goats, supplied 10,170 tons
0%
2019A 2020A 2021E 2022F 2023F 2024F of raw cashmere which is 48% of global output. Mongolia being one of the biggest raw
cashmere suppliers automatically benefits the company with competitive advantage.
-20%
Since 2015, raw cashmere price has increased by 6% and production of raw material at
E-Commerce growth a CAGR of 2.8%, resulting Mongolian cashmere market growing into MNT 684 bn at a
Retail sales growth
CAGR of 7.36%, with the assistance of the government’s persistent support. The
Mongolian government considers cashmere to be a critical industry for the country's
Source: McKinsey’s State of Fashion 2022
economic prosperity, so it has maintained a consistent support policy. In the past 2
years, raw cashmere production has already surpassed the 2022-2025 target of the
“Cashmere” program by the Ministry of Food, Agriculture and Light Industry. The
abundance of raw materials reduces the likelihood of the company running out of
FIGURE 19 : PORTER’S FIVE FORCE
supplies in recent years.
Logistic disruption
Threat of new Since gridlock in logistics such as increased shipping costs, port closures, vendor
entrants
5 shutdowns were and still are deemed to be the most concerning problems of
4
3
manufacturers during the pandemic, organizations that run an international business
Threat of
substition
2 Competitive
rivalry
were severely impacted. According to the BoF-McKinsey State of Fashion 2022 Survey,
1
0 87% of fashion executives anticipate logistic disruptions to harm profits next year. For
Gobi, which generates 58% of its sales revenue from the international market, the
Bargaining Bargaining
anticipated situation will have significant negative effect on the operations of the
power of
buyers
power of
suppliers
company.
COMPETITIVE POSITIONING
Domestic International
Source: Team estimates

Domestic cashmere garments market is extremely concentrated (Herfindahl-
Hirschman Index value equals 7002) with Gobi's leading share of 83%. And the
international market, too, shows oligopoly market characteristics such as the top four
firms' concentration ratio of 89%, and HHI of 2193. Low fragmentation of the market,
FIGURE 20: CASHMERE QUALITY
both domestically and internationally, is because of entry barriers such as high brand
COMPARISON recognition, physical capacity requirements and rare raw cashmere resources
Metrics Mongolian Chinese
compared to wools. Unlike traditional luxury cashmere companies that compete in
Output per goat (g) 350 200
foreign cashmere markets, Gobi produces pure cashmere garments at a low cost.
Impurity 25% 30%
However, Gobi is threatened by the high bargaining power of buyers and substitutes
Diameter (microns) 16.5 15.5
[Figure: 19], forcing the products to be highly competitive in terms of quality and
Length (mm) 45 38
design. [Appendix: B-2]
Superior quality and inferior processing
Source: MOFA of Mongolia
Superior quality of Mongolian cashmere contribute to Gobi’s competitive edge in the
products. The main difference between the largest raw cashmere suppliers, Mongolian
and Chinese cashmere, is in their distinct herding styles, nomadic and stationary.
Mongolian cashmere goats produce longer, thicker cashmere as well as more output,
FIGURE 21: BCG MATRIX making it easier to construct products from naturally fragile materials. Since the
competitors use Mongolian cashmere as well, the processing of raw cashmere plays an
important role in distinguishing it from other rivals. Competitors either outsource
primary processing to organizations that are specialized in processing for more than a
century, or they have the experience themselves. Gobi holds only ISO 9001:2015
certification, while other competitors hold global organic textile standard, OEKO
confidence in textile standard 100, EU ecolabel and other international certificates. We
believe that Gobi needs to upgrade its cashmere processing to meet many world
standards in order to outperform its competitors.
Vertical integration is a double-edged sword
The company differentiates itself from their competitors with their vertically integrated
supply chain, from the purchase of raw cashmere from herders to sale of clothes in its
international network of company stores [Appendix B-3]. By processing its raw
materials, Gobi minimizes reliance on suppliers and maintains a cost advantage over its
competitors who import them from Mongolia and China. Complete control over clothing

design and quality makes it possible for Gobi to respond quickly to new market trends and take advantage of economies
of scale. The vertical integration is seen as a core competence of Gobi JSC because it 1) benefits the customers with
low-priced products 2) is not easy for competitors to imitate since large amounts of capital and skilled administration
and workforce are required 3) can be leveraged widely to all types of cashmere products. Despite the advantages of
vertical integration, poor planning could greatly reduce the vertically integrated company’s profitability by putting the
company at risk of perishable inventory surpluses and organizational inefficiency. Although vertical integration protects
the company from supply chain disruption, non-vertically integrated businesses can choose from highly specialized
and technologically advantageous vendors. Such specializations need a high amount of capital investments to conduct
vertically integrated operations, which is the source of increased fixed expenditures.
FIGURE 22: VERTICALLY INTEGRATED SUPPLY CHAIN
Market Sales
Production Inputs Primary Processing Deep Processing Value-Added Products
Income
Accessories
Scouring
Sweaters & Cardigans
Knitting
Dresses & Skirts
Domestic and
Raw cashmere Carding Trousers & Leggings International market
Coats & Blazers
Weaving
Loungewear
Spinning into Yarn
Blanket
GOBI
FINANCIAL ANALYSIS
FIGURE 23: DuPont ANALYSIS
Net profit margin TABLE 3: KEY FINANCIAL RATIOS

GOBI GOBI 2018 Industry avg.
-39.42% 10.24% 11.82%
2019A 2020A 2021E 2022F 2023F 2024F 2025F 2026F
ROA
DuPont Analysis
-12.15% 7.15% 10.82% Gross Margin 32.3% 38.9% 39.9% 44.2% 46.7% 47.6% 49.4% 50.9%
ROE Asset runover Operating Margin 12.4% -15.3% -5.1% 1.1% 15.9% 14.0% 19.7% 21.2%
GOBI GOBI 2018 Industry avg. GOBI GOBI 2018 Industry avg. Pretax Margin 2.0% -40.6% -24.3% -15.3% 2.6% 3.4% 11.7% 15.3%
-70.73% 15.1% 17.93% 0.31 0.7 1.21
Net Margin 1.2% -39.4% -23.6% -14.8% 1.9% 2.5% 8.8% 11.4%
Leverage
Asset Turnover 0.6 0.3 0.4 0.5 0.6 0.8 0.9 1.2
5.82 2.11 1.82 Pretax ROA 1.2% -12.5% -9.9% -7.6% 1.5% 2.6% 10.6% 17.5%
ROE 3.1% -70.7% -92.7% -95.4% 10.5% 21.0% 43.4% 60.1%
Liquidity Indicators
FIGURE 24: NET MARGIN AND D/E RATIO
Quick Ratio 0.1 0.1 0.1 0.2 0.3 0.2 0.3 0.3
15 20%
Current Ratio 0.9 0.7 0.8 0.7 0.8 0.8 0.9 1.0
0% Leverage Indicators
10
-20% Assets/Equity 4.4 5.8 9.6 13 9.2 11 5.5 4.6
5 Debt/Equity 3.4 4.8 8.6 12 8.2 10 4.5 3.6
-40%
Operating Efficiency Indicator
0 -60%
Inv Turnover 0.8 0.4 0.6 0.7 0.9 1 1.2 1.4
Avg. Inventory Days 458.0 985.8 665.3 553.1 426.6 352.2 300.5 257.8
D/E ratio Net Margin Fixed Asset Turnover 1.6 0.8 0.9 1.1 1.3 1.7 2.1 2.6
Source: Company data, Team estimates Source: Company data, Team estimates
Company is enduring on the edge because of the future revenue

FIGURE 25: AVG. INVENTORY DAYS
COMPARED TO PEERS uncertainty
1000
Over a 5 year period, we forecasted a CAGR of 25.58% increase in future revenue. GOV’s
800 overall sales come from 3 primary product lines such as knitwear, sewn, and woven
600 with the weights of 69%, 21% and 10%. We analyzed that the sales growth rate of non-
knitwear products, especially sewn(from 39.24% 2017A to 3% 2019A), is decreasing.
400
Although GOV's revenue has a strong correlation with Real GDP growth [0.56] and
200 tourist traffic [0.51], sales may not recover until 2023. The cloudy growth since its rapid
0
dropdown of revenue [44% decline] in 2020 has put massive pressure on the
2016A 2017A 2018A 2019A 2020A company's sustainable operation. A large amount of marketing expenses (avg. MNT 30B
GOBI SHENZHOU LUX HANSAE
2018A-2020A) could either increase brand recognition, leading to increased foreign
sales, or lower net margin enormously, causing operational disruption.[Figure 23]

FIGURE 26: GOBI JSC’S EPS AND ROE Abnormal leverage is the main problem of company
40 40% D/E ratio of 2.13 (5-year average) is indicating that the Gobi is using unhealthy leverage
20 20%
compared to peer average of 0.8.[Figure 24] We believe that this is potentially damaging
to the company's future profitability and puts its stockholders at risk. We also compared
0
2016A 2017A 2018A 2019A 2020A
0%
its Debt to Capital ratio of the previous fiscal year (amounted 0.77) to the market peers
-20 -20% Shenzhou, Lux and Hansae Co, with 0.26, 0.4 and 0.59. The result indicates a higher
-40 -40%
degree of leverage and heavy dependence on debt of Gobi. Also, the company’s times
interest earned ratio of 2.89, which is below the industry average (30.6 avg. 2016A-
-60 -60%
2020A), is illustrating GOV’s incompetence to meet its debt obligations based on its
-80 -80% current income.
EPS ROE Low performance is decreasing shareholders return
Source: Company data, Team estimates We expect Gobi’s future net profit margin (from -39.4% 2020A to 11.44% 2026F) to
stabilize in upcoming years, although the company may not pay any dividends until its
retained earnings improve. We analyzed that poor performance, an immense amount of
marketing expenses, and increasing interest expense has driven net margin to move
FIGURE 27: QUICK, CURRENT RATIO AND down, which has resulted in a considerable decline in ROE (from 18.81% 2016A to -70.7%
CURRENT LIABILITIES GROWTH YOY%
2020A) and EPS (from MNT 20.7 2016A to MNT -59.2 2020A).[Figure 26]
3 160% Company may run into liquidity risk
140% The company is at risk of running out of cash, as evidenced by certain concerning
2.5
120%
ratios such as the quick ratio of 0.08 and the current ratio of 0.74. Quick ratio is
2
100%
deteriorating at an annual rate of -41.6% (avg. of 2015A-2020A) and current ratio of -
20.7% (avg. of 2015A-2020A), respectively [Figure 27]. If the company doesn’t improve
1.5 80%
its effectiveness, it may face liquidation in upcoming years due to its enormous amount
60%
1 of short-term loans and high interest expense. The average inventory days of 572 days
40% (5 year average), which is 4.5 times greater than the industry median, is implying that
0.5
20% the company is struggling to turn over its inventory, resulting in reduced
0 0% liquidity.[Figure 25]
2016A 2017A 2018A 2019A 2020A
Altman-Z score and Piotroski F-score
Current liabilies growth
We also tested the company with widely used techniques such as Altman Z [Appendix
Quick Ratio A-8] and Piotroski F [Appendix A-10] scores, with less-than-expected results. The
Current Ratio Altman Z-score for GOV was 0.26, suggesting that the firm is on the verge of
bankruptcy, and the Piotroski F-score for the company was 3, showing that it is classed
as financially weak. Presuming that the impacts of the pandemic are similarly affecting
its peers, we used the Altman-Z and Piotriski F-score to test other firms, and the
following outcomes are obtained.
FIGURE 28 : VALUATION FOOTBALL FIELD TABLE 4: ALTMAN Z-SCORE AND PIOTROSKI F-SCORE COMPARISON BETWEEN PEERS
SHENZHOU LUX
RIM HANSAE CO
123 284 Method GOBI 2018 GOBI 2019 GOBI INTERNATIONAL INDUSTRIES
LTD
GROUP HOLDINGS LTD
FCFF 189 505

Altman Z-score 3.11 1.49 0.26 16.9 9.2 3.28
EV/EBITDA 188 490 Piotroski F-score 6 5 3 7 7 6

P/BV 191 199
P/E 18 344
VALUATION
52 week High/Low 199 394 We are suggesting a SELL recommendation on GOBI JSC with a 12-month target price
of MNT 272.18, an 18.4% downside from GOV’s closing price of MNT 333.51 on 26
November, 2021, using the valuation methods such as Discounted Cash Flow to Firm
Target price: Prior close:
MNT 272.18 MNT 333.5 (70%) and Multiples valuation models (30%) [Figure 29]. Analysts usually prefer to use
the residual income model for financial institutions since it values the sum of its book
Source: MSE, Team estimates
value per share and the present value of expected residual incomes. However, we used
this method to support our SELL recommendation because the manufacturing
company has massive tangible assets and its book value gives a suitable sight on our
FIGURE 29: VALUATION MATRIX
valuation.
Method Share price Weightings Revenue projection
FCFF 299.39 70%
Relative
Our team forecasted GOV’s revenues for each of its regions such as Mongolia, APAC,
valuation
208.72 30%
Europe, Russia and North America and divided its revenues by 3 product lines. We used
RIM 179.02 0%
the “Three Horizon” method from the book "The Alchemy of Growth" to examine Gobi's
Target price 272.18
growth [Figure 34]. With the mature horizon in the domestic market, Gobi tends to be
Discount
to last price
-18.4%
innovative in horizon 2 with the new brands such as Yama, Kid Goyo, Goyo Cashmere,
Source: Team estimates Herders, Gobi Organic and Gobi. Geographically Gobi’s growth is declining in Mongolia,

FIGURE 30: WEIGHTED AVERAGE COST OF CAPITAL however, on horizon 2, the company expanded into other regions, and on horizon 3, the
Forecast Terminal company plans to expand its deliveries. We used "Six common patterns of unhealthy
Risk-free rate 8.1% 8.1% horizons" to examine the Gobi, and none of them match the firm. In other words, the
Beta 0.91 0.91 company's growth horizons appear to be healthy. With this perspective, we estimated
Equity risk premium 15.3% 17.1% revenue growth at a 25.58% CAGR (from 2021E to 2026F) using the hybrid approach,
Cost of equity 22% 23.6% which is widely used in valuation, also we used different weightings for the top-
Pre-tax cost of debt 9.4% 9.4% down[40%] and bottom-up[60%] approaches to create a more accurate forecast.
Tax % 25% 25%
Free Cash Flow to Firm
After-tax cost of debt 7% 7%
We picked the FCFF model since GOV's financial structure is currently unstable due to
WACC 13.9% 14.7%
the high degree of leverage and the necessity to invest heavily in fixed and working
Net debt (MN in MNT) 314,562
capital in order to increase sales. We applied a two-stage FCFF model, with the first
Market Cap (MN in MNT) 259,059
stage based on growth up to 2026 and the second stage based on 5.32% terminal
Enterprise value (MN in MNT) 560,823
growth. We calculated MNT 289.73 per share using a cost of capital of 22% and 23.6%,
forecast and terminal, respectively, issuing a 13.13% downside from the prior close
price. [Appendix C-2]
FIGURE 31: BETA CALCULATION
Relative valuation
Adjusted beta Weightings
Historical Regression
Due to Gobi's dominance in the domestic market and lack of publicly-listed cashmere
0.72 50%
(SMI) peers globally, we compared GOBI to similar woolen apparel manufacturing companies.
Damodaran data
(Apparel)
1.1 50% By comparing Gobi’s P/E, P/BV, EV/EBITDA multiples to the peers, the company is
Weighted beta 0.91 estimated to be overvalued. We adjusted EPS and EBITDA by the company's 6-year
Source: Team estimates, Damodaran
forecast to estimate P/E and EV/EBITDA multiples because of the abnormality in 2020.
We used equally weighted multiples to result in a valuation of MNT 208.72, which
represents a 37.4% downside. [Appendix C-3]
FIGURE 32: TERMINAL GROWTH RATE
CALCULATION
WACC
LT GDP Weightings in
Regional
growth Sales WACC is calculated by forecast cost of equity of 22%, terminal cost of equity of 23.6%
Mongolia RGDP
growth
6.1% 42% and cost of debt of 7%, since GOV’s liabilities weigh way more than its equity, we arrived
Europe RGDP growth 2.3% 32%
with cost of capital of 13.9% and 14.7%, forecast and terminal horizons, respectively
APAC RGDP growth 4.9% 18%
[Figure 30]. Cost of equity is calculated using the Capital Asset Pricing Model, with an
North-America RGDP ERP of 15.3% in forecast horizon and 17.1% in terminal horizon, risk-free rate of 8.1% and
2.5% 8%
growth
beta of 0.911 [Figure 31]. We used the enterprise value of the company to weigh its
TGR Proxy Weightings
required rates.
Weighted Average
4.4% 60%
GDP growth rate
Terminal growth rate
Long Run Average
Inflation (Historical 6.7% 40% With a) Weighted average Real GDP growth of core regions(4.39%) b)Long-run average
average)
inflation rate(6.72%) we estimated terminal growth rate as 5.32%. This growth gives us
Weighted TGR 5.3% 100%
a positive outlook for the company's future growth, which may be boosted by the
Source: Team estimates, IMF
revival of tourist traffic [Figure 32].
FIGURE 33: RELATIVE VALUATION Residual income model
Ticker P/E P/BV EV/EBITDA The residual income model usually focuses on economic profit and is more easily
GOV 48.82 2.30 9.73 applied to non-dividend-paying companies. However, because the model is commonly
2313.HK 37.66 7.05 27.24 utilized in financial institutions, we used it to support our SELL suggestion. With this
LUXIND.NS 19.37 4.39 11.21 approach, our implied price share is MNT 179.02 (46.3% downside from closing price),
105630.KS 8.81 1.63 8.82 based on the same assumptions as our FCFF model, which computed a cost of equity
Average 21.95 4.36 15.76 of 22% in forecast horizon, 23.6% in terminal horizon and a terminal growth rate of
Median 19.37 4.39 11.21 5.32%. [Appendix C-4]
Implied price 208.72
Source: Team estimates, Refinitiv

SENSITIVITY AND SCENARIO ANALYSIS
Our team executed a sensitivity analysis on our FCFF and Relative valuation models by
FIGURE 34: GOBI’S GROWTH HORIZONS changing key drivers a)Domestic and international Real GDP growth, b) Inflation rate
and c) YoY growth rate of each product line, respectively. From the estimation, we
spotted that our base case scenario is most sensitive to domestic and international real
GDP growth. Summary of the results of sensitivity analysis is shown below:
TABLE 5: SUMMARY OF SENSITIVTY ANALYSIS
Positive Negative
Base price Changes New target price Changes New target price Change to Buy
Domestic RGDP growth 272.18 1% 356.44 -1% 213.07 1.1%
International RGDP growth 272.18 1% 381.03 -1% 190.95 0.9%
Domestic inflation rate 272.18 -3% 405.07 1% 309.41 -2.3%
YoY growth on Knitted wear 272.18 10% 447.59 -5% 206.32 6%
YoY growth on Sewn 272.18 15% 388.59 -15% 204.17 13%


FIGURE 35: DOMESTIC RGDP GROWTH
SENSITIVITY
In addition, we performed a sensitivity analysis to see how forecast horizon WACC and
terminal growth rate changes our expected target price. Estimation shows that
Domestic RGDP growth
Change Target price Price change

forecast horizon WACC should decrease by at least 201bps before our recommendation
2% 473.95 74%
turns into BUY and for terminal growth rate it should increase by 202bps, respectively.
1% 356.44 31% TABLE 6: PRICE SENSITIVITY SUMMARY TABLE
0% 272.18 0%
Terminal growth rate
-1% 213.07 -22%
-2% 172.6 -37% 4.75% 5% 5.32% 5.5% 5.75%
Source: Team estimates, Damodaran 13.5% 297.6 308.63 323.73 332.78 346.02
14% 277.31 287.17 300.6 308.63 320.34
WACC
14.7% 252.17 260.66 272.18 279.04 289
15% 242.68 250.69 261.53 267.97 277.31
FIGURE 36: INTERNATIONAL RGDP GROWTH
SENSITIVITY 15.5% 227.77 235.05 244.87 250.69 259.11
Source: Company data, Team estimates Sell Hold Buy
International RGDP growth
Change Target price Price change Monte-Carlo simulation

2% 524.74 93%
Our Monte-Carlo simulation is giving a more comprehensive look at GOV’s share price.
1% 381.03 40%
We calculated a 45.4% chance of the target price providing a value in the SELL range
0% 272.18 0%
by varying Real GDP growth, inflation rates in local and international regions, and TGR.
-1% 190.95 -30%
-2% 131.23 -52% FIGURE 37: MONTE-CARLO SIMULATION

Source: Team estimates, Damodaran Hold range
450
400
350
Sell range
FIGURE 38: DOMESTIC INFLATION RATE
300
SENSITIVITY
250
Domestic inflation rate 200
Buy range
Change Target price Price change 150
-2% 353.38 30% 100
-1% 309.41 14% 50
0% 272.18 0% 0
1% 240.84 -12% <80 300.15 366.8 >640
2% 214.59 -21% Source: Team estimates
Source: Team estimates, Damodaran INVESTMENT RISK

We tried to analyze the likelihood and impact of the risks mentioned below as precisely
FIGURE 39: RISK HEAT MATRIX as possible [Figure 40] since it is a vital consideration for any investor. We assessed the
risks' impact using the impact on sales. For instance, if a risk happened and resulted in
a loss between 6% and 10% of total sales, it would be classified as moderate. Moreover,
we employed “Bow-Tie” analysis, first discussing the causes of the event and then
speculating the potential impact of the hazards on the business, to identify risk events.
The following risks range from the most severe to mild.
[MR1] Market risk | Burden of interest expense
Cause: Gobi's capital structure is heavily weighted toward debt financing (it has a D/E
ratio of 4.82). Government policy enables agricultural companies to obtain large
amounts of discounted loans from the Development Bank of Mongolia at a significantly
lower cost (e.g, Gobi's cost of debt is 7%). Even if the company is financed with low-
cost debt, the total amount of loans is enormous, burdening the company with
extremely high interest expenses (e.g, the interest expense equaled 25% of total sales
in 2020). Moreover, We believe that as the economy recovers from the pandemic, strict
monetary policy will contribute to the market through an increase in interest rates.
FIGURE 40: RISK HEAT MATRIX ASSUMPTION Impact: Therefore, at the end of the short-term discounted loans, the favorable terms
of interest rate will expire, significantly increasing the interest expenses. As we
Likelihood Impacts on sales
forecasted, the average interest coverage ratio in 2021E-2026F will be 1.42, implying
0%-10% Very unlikely
0%-1% of
sales
Negligible that Gobi JSC may suffer from this financial shift.
11%-20% Unlikely
2%-5% of
sales
Minor [SR1] Strategic risk | Poor liquidity
21%-40% Possible
6%-10% of
Moderate
Cause: Since 2017, the company's inventory in the balance has risen dramatically,
sales
accounting for more than 50% of the total assets in 2020A, and it is deemed to
11%-20% of
41%-60% Likely
sales
Significant continue growing further, raising the risk of quality degradation, model lag of leftover
20%-40% of products and sales loss. Gobi JSC's inventory turnover is incredibly low at 0.37. 1
61%-80% Very likely Severe
sales
Consequently, the company is projected to experience liquidity difficulties in the near
future regarding their projected extremely low average quick ratio of 0.13 in 2021A-
2026F.
Impact: The company will have difficulty in paying off short-term loans since the
majority of the company’s loans are short-termed (98.3% of the total loans being

FIGURE 41: MITIGATION SUMMARY short-term in 2020A) and in conducting its daily operations due to lack of cash. We
believe the effective strategies to sell off the excess inventory will mitigate this risk.
Risk name Mitigation
[BR1] Business risk | Supply chain disruption
MARKET RISKS Cause: In the event of a natural disaster or a pandemic, Gobi is susceptible to export
disruptions as a substantial portion of its sales is generated in the international market.
Burden of interest
Indefinable As stated in the Oxford Economics, Global Risk Survey, approximately half of global
expense
businesses suffered supply chain disruptions in 2021, with one in eight severely
Storage policy impacted.
Raw cashmere price
swings
Contracts with Impact: The supply chain disruption is deemed to reduce the international sales of
25000 herders
Gobi in the same way it did in 2020 and 2021. The way to overcome the logistics
Foreign currency
problem is to raise the quantity of one-time transportation by increasing working
Currency
fluctuation
denominated
receipts
capital. However, this can lead to a shortage of cash, which in turn leads to increased
financing.
OPERATIONAL RISKS
[MR2] Market risk | Raw cashmere price swings
Lack of fashionable Collaboration with Cause: According to the Mongolian Agricultural Exchange, the price of raw cashmere
products designers
ranged between MNT 115,000 and MNT 140,000 per kg between June and November
Cyber attack New IT department
2021. Moreover, the government of Mongolia set the minimum price of raw cashmere
at MNT 100,000 in order to support herders' livelihoods during the pandemic, forcing
REGULATORY RISKS
the cashmere goods producers to buy the raw materials at a higher price.
Impact: The company is put at risk by these swings in raw material prices. Gobi's
Uncertainty in storage policy and contracts with suppliers, we believe, will help the company hedge
government Indefinable
support against price swings.
STRATEGIC RISKS
[OR1] Operational risk | Lack of fashionable products
Cause: The fashion industry companies are required to always innovate and develop
Strategies to sell off
Poor liquidity
the excess inventory new products to satisfy their customers' needs. Owing to this factor, the industry’s
product life cycle is extremely short and the company’s creativity is the essential part
BUSINESS RISK of competitive advantage to keep up with the trends. In general, high-end brands
release approximately five to six collections per year while Gobi, they've produced an
Supply chain Increase one-time
disruption transportation average of 10-12 collections per year for the last four years.
Impact: Gobi constantly collaborates with foreign and local designers for new
collections of fashionable designs. As a result, we believe that this risk is very unlikely
to occur in the near future. However, this is a significant risk for fashion businesses like
Gobi and they should always be aware of this.
[MR3] Market risk | Currency fluctuation
Cause: Given the company's international presence, 58% of Gobi's revenue is
denominated in various foreign currencies, and owning 3 subsidiaries in foreign
countries makes the translation risk inevitable. Also, The company’s 52.14% of total
loans taken by foreign currencies in 2020.
Impact: These conditions lead to Gobi's currency rate risk. Based on historical data,
currency rate fluctuations have never exceeded 1% of total sales, we classified the
impact of this risk as negligible.
[OR2] Operational risk | Cyber attack
Cause: As a result of the pandemic, Gobi has made e-commerce an integral part of its
operations, accounting for 27% of total sales revenue, raising a risk for the company like
cyber attacks. According to Verizon's Data Breach Investigations Report 2021, the
number of events that jeopardize the integrity, confidentiality, or availability of data in
retail increased by 152% and the number of security breaches increased by 33% in
2020.
Impact: Data breaches and cyber-attacks can have serious reputational and
compliance ramifications. We believe that the company's new IT department will
mitigate the risk.
[RR1] Regulatory risk | Uncertainty in government support
Cause: The Mongolian cashmere industry is heavily influenced by the government
since it is one of the country’s leading industries. The government tries to sustain Gobi
as a local manufacturer and exporter, through soft loans. Consequently, the company
became dependent on government assistance, with huge amounts of short-term soft
loans. Unfortunately, "Cashmere" program by the government which aimed to sustain
the local cashmere industry has met its end in 2021.
Impact: This leaves the company in a financially uncertain circumstance, bringing
about difficulties in planning strategies.

APPENDIX
APPENDIX A: FINANCIALS APPENDIX B : INDUSTRY AND COMPETITIVE POSITIONING

Appendix A-1: Revenue projection Appendix B-1: Business model canvas
Appendix A-2: Income statement Appendix B-2: Porter’s five forces
Appendix A-3: Balance sheet Appendix B-3: SWOT analysis
Appendix A-4: Income statement assumption Appendix B-4: Value chain analysis on Gobi
Appendix A-5: Balance sheet assumption APPENDIX C: VALUATION

Appendix A-6: Cash flow statement Appendix C-1: Valuation summary
Appendix A-7: Peer comparison Appendix C-2: FCFF Valuation
Appendix A-8: Altman Z-score Appendix C-3: Relative valuation
Appendix A-9: Beneish M-score Appendix C-4: Residual income model
Appendix A-10: Piotroski F-score Appendix C-5: Cost of equity
Appendix C-6: Cost of debt
Appendix C-7: Terminal growth rate
APPENDIX D: ENVIRONMENT, SOCIAL & GOVERNANCE

Appendix D-1: Governance scorecard
Appendix D-2: Social scorecard
Appendix D-3: Environment scorecard
Appendix D-4: Overview of board members
LIST OF ABBREVIATIONS
Abbreviation Full term Abbreviation Full term
Association of Chartered Certified

ACCA HHI Herfindahl–Hirschman index
Accountants
APAC Asia Pacific IMF International Monetary Fund
B2B Business to Business ISO International Organization for Standardization
B2B Business to Customer IT Information Technology

BCG Boston Consulting Matrix JSC Joint Stock Company
BoD Board of Directors KPI Key Performance Indicators
BoF Business of Fashion LLC Limited Liability Company
CAGR Compounded Annual Growth Rate MSE Mongolian Stock Exchange
Organization for Economic Co-operation and

CEO Chief Executive Officer OECD
Development
COGS Cost of Goods Sold PCE Private Consumption Expenditure
CSR Corporate Social Responsibility PV Present Value
D2C Direct to Customer RIM Residual Income Model
DCF Discounted Cash Flow ROA Return on Asset
EMEA Europe, Middle East & Africa ROE Return on Equity
EPS Earnings Per Share TTM Trailing 12 months
ERP Equity Risk Premium TV Terminal Value
ESG Environment, Social and Governance WACC Weighted Average Cost of Capital
EV Enterprise Value WC Working Capital
FCFF Free Cash Flow to the Firm YoY Year over year

APPENDIX A: FINANCIALS
APPENDIX A-1: REVENUE PROJECTION
Top-Down approach (40%) 2019A 2020A 2021E 2022F 2023F 2024F 2025F 2026F
Real GDP growth 5.2% -5.3% 5.2% 7.5% 6.5% 6.0% 5.5% 5.0%
Inflation 5.2% 2.3% 13.4% 7.3% 7.3% 6.7% 6.3% 6.0%
Domestic
Revenue growth 25.9% -62.3% -6.3% 44.5% 34.8% 32.8% 29.8% 26.4%
Revenue (In Million MNT) 128,253 48,341 45,295 65,442 88,227 117,162 152,120 192,296
Real GDP growth 3.2% -3.0% 5.9% 4.9% 3.7% 3.6% 3.4% 3.4%
Inflation 2.8% 2.2% 2.9% 2.9% 2.7% 2.6% 2.7% 2.7%

Foreign
Revenue growth 22.0% -9.0% 34.8% 28.8% 29.3% 29.6% 26.1% 26.1%
Revenue(In Million MNT) 74,125 67,429 90,878 117,082 151,323 196,034 247,130 311,543
Total 202,378 115,770 136,173 182,524 239,551 313,196 399,250 503,839
Bottom-up approach (60%)
Knitted(In Million MNT) 115,440 80,242 91,899 102,575 125,289 155,418 194,221 241,819
Growth % 34.9% -30.5% 14.5% 11.6% 22.1% 24.0% 25.0% 24.5%
Woven(In Million MNT) 36,013 11,436 11,470 11,505 13,117 15,314 18,122 21,301
Growth % 3.3% -68.2% 0.3% 0.3% 14.0% 16.8% 18.3% 17.5%
Sewn(In Million MNT) 50,926 24,091 32,123 37,002 48,903 64,487 82,714 107,583
Growth % 20.8% -52.7% 33.3% 15.2% 32.2% 31.9% 28.3% 30.1%
Total 202,378 115,770 135,492 151,082 187,309 235,220 295,057 370,703
Total Revenue (Hybrid approach) 135,696 160,515 202,981 258,613 326,315 410,644
Source: IMF, Team estimates

To forecast future revenues, we used both top-down (40%) and bottom-up (60%) methodologies. We separated its sales by domestic and foreign (Europe, APAC, and North
America) and used Real GDP growth and inflation rates as revenue drivers in the top-down approach. We also use IMF (International Monetary Fund) predictions on regional
macroeconomic variables. And, we anticipated its growth by product lines using a bottom-up approach.
APPENDIX A-2: INCOME STATEMENT

In Million MNT 2019A 2020A 2021E 2022F 2023F 2024F 2025F 2026F
Revenue 209,748 117,093 135,764 163,659 208,205 266,410 336,734 423,957
COGS -141,952 -71,536 -81,562 -91,256 -111,020 -139,522 -170,484 -208,056
Gross profit 67,796 45,556 54,202 72,403 97,185 126,888 166,250 215,902
OPEX -38,185 -57,462 -61,064 -70,573 -64,053 -89,602 -99,975 -125,845
Other Income -3,713 -6,035 -26,104 -27,765 -28,233 -28,991 -27,408 -26,013
EBIT 25,899 -17,941 -6,862 1,830 33,132 37,286 66,275 90,057
Interest expense -21,811 -29,542 -26,104 -26,823 -27,746 -28,247 -26,819 -25,400
EBT 4,087 -47,483 -32,966 -24,992 5,386 9,038 39,455 64,657
Income tax expense -1,631 1,328 922 699 -1,347 -2,260 -9,864 -16,164
Net profit 2,456 -46,155 -32,045 -24,294 4,040 6,779 29,591 48,493
APPENDIX A-3: BALANCE SHEET

Cash and cash equivalents 10,642 12,799 8,562 16,182 40,917 27,074 35,018 14,670
Trade and other receivables 12,976 5,996 8,778 10,582 13,462 17,225 21,772 27,411
Prepayments and advances 4,215 3,001 9,528 11,101 9,380 13,848 15,226 19,508
Inventories 178,136 193,208 148,662 138,294 129,760 134,645 140,340 146,973
Corporate income tax receivables 267 265 240 289 368 471 595 750
Right to returned goods assets 565 646 0 0 0 0 0 0

Total current assets 206,801 215,915 175,770 176,448 193,887 193,263 215,211 215,705
PP&E 134,043 156,243 156,282 154,679 160,913 160,877 160,877 160,877
Right-of-use assets 2,371 2,631 0 0 0 0 0 0

Deferred tax assets 2,710 4,073 0 0 0 0 0 0
Other non-current assets 574 951 0 0 0 0 0 0
Total non-current assets 139,699 163,899 156,282 154,679 160,913 160,877 160,877 160,877
Total assets 346,500 379,814 332,052 331,127 354,800 354,140 373,828 370,189
Trade and other payables 41,557 25,534 20,507 22,944 27,913 35,079 42,864 52,310
Borrowings from banks 189,268 267,714 209,132 216,670 222,449 218,226 191,707 162,584
Total current liabilities 230,825 293,248 229,638 239,614 250,362 253,305 234,571 214,894
Long term lease liability 1,866 1,901 1,736 1,690 1,685 1,755 1,818 1,908
Borrowings from banks 32,560 4,458 52,926 51,528 51,355 53,512 55,433 58,167
Long term other payables 2,086 14,955 13,182 12,833 12,790 13,327 13,806 14,487
Total non-current liabilities 36,511 21,315 67,844 66,052 65,829 68,594 71,057 74,562
Total liabilities 267,337 314,562 297,483 305,666 316,191 321,899 305,628 289,456
Share capital 780 780 780 780 780 780 780 780
Revaluation surplus 15,648 48,975 48,975 48,975 48,975 48,975 48,975 48,975
Foreign currency translation reserve -279 -1,362 0 0 0 0 0 0
Retained earnings 63,014 16,859 -15,186 -24,294 -11,146 -17,515 18,445 30,978
Total owners equity 79,163 65,252 34,569 25,461 38,609 32,240 68,200 80,733
Total liabilities and Owners equity 346,500 379,814 332,052 331,127 354,800 354,140 373,828 370, 189

APPENDIX A-4: INCOME STATEMENT ASSUMPTION
Line item Assumptions
Revenue Hybrid approach was used (Appendix A-1)

We divided COGS by its product lines(knitted, woven and sewn) and calculated their 5 year average percentage of sales of 35.2%, 13.6% and 10%.
COGS We also determined that COGS is linked to inflation, therefore we projected by giving a 30% for this approach and a 70% for the percentage of
sales method.
In this item, we included S&M and G&A expenses as one and classified them as fixed and variable costs. Fixed costs, such as rental expense, may
OPEX
remain constant in the future. We forecasted variable costs, such as salaries and marketing expenses, by percentage of sales.
Interest expense was estimated by considering the D/E ratio since the unstable financial structure is making the company vulnerable to the
Interest expense
policy interest rate. We projected D/E ratio will increase until 2023F, we believe interest expense won’t decrease in upcoming years.
Income tax expense Income tax expense was calculated using the
APPENDIX A-5: BALANCE SHEET ASSUMPTION

Line item Assumptions
Trade and other receivables This item is forecasted by account receivables ratio of past 5 years average, which is 15.4.
Prepayments and advances It is forecasted by using average of previous 5 years.

Inventories is divided into 5 sub-items such as raw materials, work in process, finished products, supply materials and goods in transit. We
Inventories
forecasted each of them by its last 5 year average growth.
Corporate income tax receivables It is forecasted by using average of previous 5 years.
Since buildings and equipment make up the majority of PP&E, we forecasted this item using their turnover ratios. In addition, given Gobi's
PP&E
inventory reduction goal, we anticipate the company will not invest in fixed capital after 2025.
Trade and other payables This item is calculated by using days payable outstanding ratio of 92 days.
This item is forecasted by last 2 years average weight in assets of 0.646 and we decreased this ratio in last 2 years of forecasted horizon hoping
Borrowings from banks (Short term)
that GOBI’s financial structure will become healthy.
Long term lease liability This item is forecasted by last 2 years average weight in assets of 0.005.
Because of the pandemic, GOBI is now paying a lot of short-term debt and needs to borrow long-term loans, therefore, we projected it by 2015-
Borrowings from banks (Long term)
2017’s average weight in assets of 0.164.
Long term other payables This item is forecasted by last years weight in assets of 0.041
Share capital We believe this item will remain constant in upcoming years.
Revaluation surplus We believe this item will remain constant in upcoming years.
Foreign currency translation reserve This item is straight-lined as 0.

This item is calculated by adding net profit on previous years retained earnings. Since, Gobi is stopped paying dividend from 2018, we didn’t
Retained earnings
included dividend in calculating retained earnings.
APPENDIX A-6: CASH FLOW STATEMENT

Profit for the year 2,456 -46,155 -32,045 -24,294 4,040 6,779 29,591 48,493
Depreciation and amortization 10,653 12,820 8,345 8,662 10,247 9,739 9,870 10,013
Income tax expense 1,631 -1,328 -922 -699 1,347 2,260 9,864 16,164
Interest expense 21,133 28,829 26,104 26,823 27,746 28,247 26,819 25,400
Other 1,978 9,300 0 0 0 0 0 0
Operating Profit before WC changes 37,852 3,466 1,483 10,493 43,379 47,025 76,145 100,070
Increase in accounts and other receivables -763 10661 -2782 -1804 -2880 -3763 -4547 -5640
Increase in prepayments and advances 3652 1215 -6527 -11101 148 -2747 -5846 -5660
Increase in inventories 27436 -15653 44546 10368 8533 -4885 -5695 -6633
Increase in right to returned goods asset -297.273 -80.773 0 0 0 0 0 0
Increase in accounts and other payables -884 -4777 -5027 2437 4969 7166 7785 9446
Income tax paid -4,007 -7 -5 -4 -1,347 -2,260 -9,864 -16,164
Interest paid -20,798 -29,586 -26,104 -26,823 -27,746 -28,247 -26,819 -25,400
Net cash flows used in operating activities 42,191 -34,762 5,588 -16,429 26,403 14,549 41,022 66,183
Acquisition of property, plant and equipment -34,809 -914 -39 1,602 -6,233 36 0 0
Net cash flows (used in)/from investing activities -34,809 -914 -39 1,602 -6,233 36 0 0
Proceeds from borrowings 248,766 303,033 286,580 294,463 304,602 310,102 294,426 278,847
Repayment of borrowings -244,761 -264,471 -296,366 -272,016 -300,038 -338,529 -327,505 -365,378
Net cash flows from financing activities -1,732 37,833 -9,787 22,447 4,565 -28,428 -33,078 -86,531
(Decrease)/increase in cash and cash equivalents 5,701 2,157 -4,237 7,621 24,734 -13,843 7,944 -20,348
Cash and cash equivalents, at the beginning of the year 4,941 10,642 12,799 8,562 16,182 40,917 27,074 35,018
Cash and cash equivalents, at the end of the year 10642 12799 8562 16182 40917 27074 35018 14670
APPENDIX A-7: PEER COMPARISON

Net income margin 2018A 2019A 2020A
-40% -30% -20% -10% 0% 10% 20% 30% NET INCOME MARGIN
GOBI
GOBI 10.2% 1.2% -39.4% 2018A
SHENZHOU INTERNATIONAL GROUP
SHENZHOU INTERNATIONAL GROUP HOLDINGS LTD 21.4% 21.9% 22.1% HOLDINGS LTD
2019A
LUX INDUSTRIES LTD
LUX INDUSTRIES LTD 8.2% 7.2% 6.5%
2020A HANSAE CO LTD
HANSAE CO LTD -2.9% 2.7% 3%
ROE
-75% -50% -25% 0% 25% 50% ROE
GOBI 15.1% 3.1% -70.7%
2018A GOBI
SHENZHOU INTERNATIONAL GROUP HOLDINGS LTD 21.7% 21.5% 19.5%
SHENZHOU INTERNATIONAL GROUP
LUX INDUSTRIES LTD 27.1% 25.3% 23.6% 2019A HOLDINGS LTD
HANSAE CO LTD -11.4% 9.3% 10.7% LUX INDUSTRIES LTD
2020A
HANSAE CO LTD

Book D/E ratio 0.3 BOOK D/E RATIO
GOBI 1.1 3.4 4.8

0.99
SHENZHOU INTERNATIONAL GROUP HOLDINGS LTD 0.1 0.16 0.3
1.2
LUX INDUSTRIES LTD 0.4 1 0.99
HANSAE CO LTD 1.2 0.97 1.2 4.8
Current ratio
GOBI 1.4 0.9 0.7 2.7 CURRENT RATIO
SHENZHOU INTERNATIONAL GROUP HOLDINGS LTD 3.7 3.7 2.7 1.6

LUX INDUSTRIES LTD 1.8 1.4 1.6
1.3
HANSAE CO LTD 1.4 1.7 1.3
Source: Team estimates 0.7
APPENDIX A-8: ALTMAN Z-SCORE

Altman Z-score 2019A 2020A 2021E The Altman Z-score is a way of determining if a company is headed for bankruptcy by
using a credit strength test that gauges a publicly traded manufacturing company. We
Z1 Working Capital/Total assets -0.07 -0.21 -0.13 estimated Gobi's Z-score of 0.46 which is well below 1.8 and it indicates that the
Z2 Retained earnings/Total assets 0.18 0.04 -0.03 company’s possibility of bankruptcy is high.
• The formula takes into account profitability, leverage, liquidity, solvency, and
Z3 EBIT/Total assets 0.07 -0.05 -0.01
activity ratios.
Z4 Market value of stock/ Book value of liabilities 0.79 0.48 0.72 • An Altman Z-score close to 1.8 suggests a company might be headed for
Z5 Sales/Total assets 0.61 0.31 0.40 bankruptcy, while a score closer to 3 suggests a company is in solid financial
positioning.
Z-score 1.50 0.26 0.61
GOBI’s 2020 Z-score

APPENDIX A-9: BENEISH M-SCORE
Beneish M-Score 2019A 2020A 2021E Beneish Model is a mathematical model to identify whether a company has
manipulated its earnings, and is used as a tool to uncover financial fraud. Gobi's M-
DSRI Days sales in a receivables index 0.9 0.8 1.3 score is below -2.22 in both 2019 and 2020 which illustrates the likelihood of non-
GMI Gross margin index 1.1 1.5 0.8 manipulation.
AQI Asset quality index 1.1 0.5 1.8
SGI Sales growth index 1.2 0.6 1.2
DEPI Depreciation index 1.0 2.2 0.6

Sales and general and administrative expense
SGAI 1.0 2.7 0.8
index
LVGI Leverage index 1.5 1.0 1.1
TATA Total accuals to total assets 0.0 0.0 0.0
M-Score -2.5 -3.3 -1.8
APPENDIX A-10: PIOTROSKI F-SCORE

Piotroski F-Score 2018A 2019A 2020A The Piotroski score is used to assess which companies offer the best value, with
nine being the best and zero representing the worst. In 2018 and 2019, the Gobi
Profitability criteria
company's F scores were 6 and 5, respectively. This indicates that the financial
1 Net income >0 (+1) 1 1 0 position of the business is average. The F score in 2018 is a result of the company's
2 ROA>0 (+1) 1 1 0
inability to generate net cash flow from operations and a low turnover ratio. As for
the factors that determine the company's profitability in 2019, even though the
3 CFO>0 (+1) 0 1 0 company meets all the criterias, the F point is decreased due to the increase in
4 CFO>net income (+1) 0 1 1 long-term debt from the previous year and decreased turnover ratio. In 2020, the
company earned a Piotroski score of 3 and was classified as financially weak,
Leverage liquidity and source of funds criteria
because of its failure to meet profitability and liquidity criteria.
5 Long term debt CY<Long term debt PY (+1) 1 0 1
6 Current ratio CY>Current ratio PY (+1) 0 0 0

7 No new shares issued in the last year (+1) 1 1 1
Operating efficiency criteria
8 Gross margin CY> Gross margin PY (+1) 1 0 0

Asset turnover ratio CY>asset turnover ratio
9 1 0 0
PY (+1) 2020 2019 2018
F score 6 5 3
APPENDIX B: INDUSTRY AND COMPETETIVE POSITIONING

APPENDIX B-1: BUSINESS MODEL CANVAS
Key Key Value Customer Customer
Partners Activities Propositions Relationship Segments
- Design - Active and popular social media Diversified by brands :
- Production of cashmere goods channels - Gobi cashmere- mass market
- Collaborates with Wechat, Taobao and
- B2C, B2B and D2C services - Online Personal Assistance through - Yamā brand- classic and trendy
Tmall for sales in China.
- Retail website clothes for luxury customers
- Shippings in European region
- Goyo cashmere - colorful and
countries are conducted by local Key - Quality
Channels creative clothes for youth
partners, Seven Senders and DHL for Resources - Design
- KID GOYO - Children
adding value in the delivery process. - Affordable pure cashmere
- Gobi organic- Unpainted and
- Gobi joins forces with Ogilvy for - Own website for e-commerce - Online website unbleached cashmere for allergic
marketing in the EU and Americas. - Factory and production equipments - Branch stores people
- Local herders for cashmere supply - Specialized factory workers - Franchise store - Herders-environment friendly
- Brand - Sales channel partners sustainable cashmere- niche market
Cost Revenue
Structure Streams
- Sales of cashmere garments

- Manufacturing
- Additional revenue streams: Franchise stores
- Advertising
- Contract manufacturing

APPENDIX B-2: PORTER’S FIVE FORCE ANALYSIS
DOMESTIC INTERNATIONAL
Threat of new Threat of new

entrants entrants
5 5
4 4
3 3
Threat of 2 Threat of 2
Competitive rivalry Competitive rivalry
substition substition
1 1
0 0
Bargaining power Bargaining power Bargaining power Bargaining power

of buyers of suppliers of buyers of suppliers
0- No threat 1- Insignificant 2-Low 3-Moderate 4-High 5-Very high

APPENDIX B-2: SWOT ANALYSIS
APPENDIX B-4: VALUE CHAIN ANALYSIS ON GOBI

activities
Support
activities
Primary
Gobi’s proprietary processing and product design add value to cashmere, helping to increase its selling value. The
company does not outsource its procurement, ensuring quality standards from the point of raw cashmere selection.
Through their after-sales services, Gobi fosters brand loyalty. Outsourcing is used in international marketing and online
sales delivery, allowing the company to quickly adapt to the market and provide qualified service.

APPENDIX C: VALUATION
APPENDIX C-1: VALUATION SUMMARY
VALUATION FOOTBALL FIELD
Valuation
Method Share price Weightings
FCFF 299.39 70% RIM 123 284
Relative valuation 208.72 30%
RIM 179.02 0%
Target price 272.18 FCFF 189 505

Change to last close -21.6%
WACC EV/EBITDA 188 490
Inputs Forecast Terminal
Risk free rate 8.1% 8.1%
Beta 0.91 0.91 P/BV 191 199
ERP 15.3% 17.1%
Cost of equity 22% 23.6%
Pre-tax cost of debt 9.4% 9.4% P/E 18 344
Tax % 25% 25%
After-tax cost of debt 7% 7%
Net debt/EV 53.8% 52 week High/Low 199 394
Market cap/EV 46.2%
WACC 13.9% 14.7% 0 100 200 300 400 500
Source: Team estimates Source: Team estimates Target price: Prior close:
MNT 272.18 MNT 333.5
Gobi JSC acquired Mongolian

“STOCK MOVEMENT THROUGH HISTORY” cashmere industry top
manufacturer brand “Goyo”
Gobi JSC opened

Hit all-time high its branch store
and splitted the in North-America.
stock 100-for-1.
400
Gobi launched its
e-commerce platform at
www.gobicashmere.com
300
The company Gobi JSC

introduces opened its first
cashmere Gobi JSC’s branch store in
printing factory output Germany.
technology for capacity
the first time in
200 doubles
Mongolia.
Gobi JSC
Gobi JSC was opens a
fully owned by store in
the private Tokyo,
sector. Japan Pandemic
occurred.
100
0
1/2/2007 1/2/2008 1/2/2009 1/2/2010 1/2/2011 1/2/2012 1/2/2013 1/2/2014 1/2/2015 1/2/2016 1/2/2017 1/2/2018 1/2/2019 1/2/2020 1/2/2021
Source: MSE, Company data
APPENDIX C-2: FCFF VALUATION

In Million MNT 2020A 2021E 2022F 2023F 2024F 2025F 2026F
EBIT -17,941 -6,862 1,830 33,132 37,286 66,275 90,057
Tax 25% 25% 25% 25% 25% 25% 25%
Depreciation 4,954 8,345 8,662 10,247 9,739 9,870 10,013
Fixed capital investment 22,200 39 -1,602 6,233 -36 0 0
Working capital investment 22,980 -30,881 -9,380 -12,264 6,053 3,960 7,262
FCFF -53,682 34,041 21,017 41,127 31,687 55,616 70,293
Discount factor 0.88 0.77 0.68 0.59 0.52
Discounted FCFF 18,445 31,676 21,418 32,992 36,595

Sum of discounted FCFF 141,127
Terminal value at 2026 748,951
PV of terminal value 389,912

Equity value 233,556
Implied price MNT 299.39

APPENDIX C-3: RELATIVE VALUATION
Ticker Company name Country MCAP (In Million USD) GDP/capital (In USD) ROE P/E P/BV EV/EBITDA
GOV Gobi JSC Mongolia 60,069 4,007 -70.7% 48.8 2.3 9.7
2313.HK Shenzhou International Group Holdings LTD Hong Kong 33,131,022 46,324 19.5% 37.7 7.1 27.2
LUXIND.NS LUX Industries LTD India 670,173 1,901 31.1% 19.4 4.4 11.2
105630.KS HANSAE CO LTD South Korea 549,353 31,489 19% 8.8 1.6 8.8
Regional Average 26,571 23.2% 22 4.36 15.8
Regional Median 31,489 19.5% 19.4 4.39 11.2
P/E P/BV EV/EBITDA
Implied P/E multiple 19.4 Implied P/BV multiple 4.39 Implied EV/EBITDA multiple 11.21
GOV EPS 2021-2026F average 6.96 Gov BV 44.3 GOV EBITDA in 2021-2026F ave. 46,432,253
Implied price 134.76 Implied Price 194.53 Enterprise value 520,505,557
Source: Team estimates Equity value 231,584,852
Share outstanding 780,112,500

*Due to the lack of publicly listed cashmere company in world we picked woolen product manufacturers as our peer companies. We
believe the multiples can provide an appropriate give because the process of creating woolen and cashmere goods is the same. Implied price 296.86
Price 208.72
APPENDIX C-4: RESIDUAL INCOME MODEL

2020A 2021E 2022F 2023F 2024F 2025F 2026F
Net income (Million MNT) -46,155 -32,045 -24,294 4,040 6,779 29,591 48,493
Shares outstanding (Thousand) 780.1 780.1 780.1 780.1 780.1 780.1 780.1
EPS -59.2 -41.1 -31.1 5.2 8.7 37.9 62.2
Book value per share 83.6 44.3 32.6 49.5 41.3 87.4 103.5
Cost of equity capital 22% 22% 22% 22% 22% 22% 22%
Equity charge 22 18 10 7 11 9 19
Residual income -80 -60 -40 -2 -2 30 40
Discount factor 0.88 0.77 0.68 0.59 0.52
Discounted residual income -35.9 -1.5 -1.5 17.1 22.4
Terminal value 257.7
Sum of PV RIM 0.57
PV of TV 134
Total PV 134.71
Implied share price MNT 179.02
APPENDIX C-5: COST OF EQUITY

Cost of equity. We computed Cost of Equity by using a Capital Asset Pricing Risk free rate Value
Model. With the 8.06% of risk-free rate, ERP of 15.29% and 17.1% in forecast U.S risk free rate (T-bill) 1.63%
and terminal horizons and 0.911 of beta we calculated cost of equity of 22%. Country risk premium (Damodaran) 6.43%
Weighted risk free rate 8.06%

Risk-Free Rate. Due to the lack of government-issued bonds, we calculated
a risk-free rate by adding a Mongolian country risk premium (Damodaran)
on the U.S T-bill rate. Equity risk
Value
Weightings in Weightings in
premium Forecast horizon Terminal horizon
Equity risk premium [ERP]. The company’s ERP is calculated by equally Damodaran 11.08% 30% 0%
weighting Damodaran data and the average growth of the TOP-20 index. Top 20 (2013-
17.10% 70% 100%
2021)
Since the company’s stock only trades on the MSE, we calculated the TOP- Weighted ERP 15.3% 17.1%
20 index’s 2013-2020 average growth as 70% of our ERP and used
Damodaran data as 30% in the forecast horizon. In the terminal horizon, we
gave 100% on the TOP-20 index’s growth. With this calculation, we came up Beta Adjusted beta Weightings
Historical Regression
with 15.3% and 17.1% in forecast and terminal horizons. (TOP20)
0.721 50%
Damodaran data
Beta. We determined this indicator by : 1)Running a regression analysis on (Apparel)
1.1 50%
Gobi’s stock price and TOP-20 index, 2)Damodaran beta of the Apparel Weighted beta 0.911
industry. Source: Team estimates
APPENDIX C-6: COST OF DEBT

Cost of debt Value
Cost of debt. The effective interest rate of GOBI was calculated by dividing Before-tax cost of debt 9.4%
its interest expense by its total debts. As we mentioned, GOBI has soft Tax rate 25%
loans, which means its cost of debt is lower than the market rate. The after- Weighted beta 7%
tax cost of debt for GOBI, including the tax shield, is estimated to be 7%. Source: Team estimates
APPENDIX C-7: TERMINAL GROWTH RATE

Terminal growth rate. We calculated a terminal growth rate of 5.3% for GOBI based on the weighted RGDP growth rate
of core regions (Weighted by its revenue weightings) and long-run inflation rate to get a more realistic sight.

APPENDIX D: ENVIRONMENT, SOCIAL & GOVERNANCE
APPENDIX D-1: GOVERNANCE SCORECARD
Criteria Rating Company Policies
Gobi has an independent member of the board in the position of

Separation of chairman/chairwoman and CEO role. 4
chairwoman.
Whether financial reports adhere to international best practices. 4 The financial reports meet international standards and are audited.
The company’s initiatives for ESG and sustainability are shortly

Whether non-financial reporting disclosures for ESG and
Executive Management 2 mentioned in the operational report but does not produce any separate
sustainability are in keeping with international best practices.
ESG or sustainability report.
The company should have ethical code and designate someone Gobi JSC has an ethical code and established ethical committee which
4
who is responsible for the implementation of the code. promotes the code internally and requires employees to follow it.
AVERAGE SCORE 3.5
Independent members of the board are the majority(5 out of 9).

Independence 3 However, the independent members do not have a policy to meet
regularly without executive board members.
Members established and are divided into Risk and Audit, Compensation,
Divisions 4
Nominee committees.
The board of directors consists of 9 members which is considered to be

Decent number of members of the board. 4
Board of Directors an optimal number.
Some of the members are somewhat affiliated. For instance, three

Members should not be affiliated. 2 members are also executives of Tavan Bogd Group while two of them are
spouses.
Gender diversity 4 Female gender ratio in BoD is 55%.
AVERAGE SCORE 3.4
The board member must have acquired corporate governance training

The criteria for nominating new board members 4
and certification.
Choices of the new board member rely on the advice of the other
Way the nominee committee finds prospective board members 2 members. For instance, one-third of the current members are executives
of Tavan Bogd Group.
Nominee Committee
The report of the committee which contains the number of meetings
Transparency of the committee 4 held, attendance by committee members, and the committee’s policies
and procedures is regularly included in annual operational reports.
AVERAGE SCORE 3.33
The audit committee's members are all independent members of Out of 3 board members serving on the audit committee, 2 members are
3
the board. independent.
Any member of the audit committee is regarded as a financial

4 One of the audit committee members is ACCA.
expert.
Risk and Audit Committee
When the internal auditor has concerns about the accuracy or
The Internal Audit Committee reports on its activities to the Risk and
integrity of the financial reports or accounting methods, the
4 Audit Committee, and the Chairman of the Committee reports to the
company's procedures and provisions ensure that the internal
Board of Directors for discussion and opinion.
auditor reports immediately to the audit committee.
AVERAGE SCORE 3.66
The compensation pack to senior management has variable The company's present remuneration package for senior management
1
instruments. does not include any stock options.
Executive compensation is linked to the long-term profitability of Net income of the company does not have any correlation with
1
the company. executive compensation based on the last five years of data.
Remuneration Committee Members of the committee regularly attended meetings during the
4 Members of the committee were present at all meetings.
previous year
The committee members are not senior executives of the

3 A member is Director of Marketing department of Tavan Bogd Group
company or other comparable companies.
AVERAGE SCORE 2.25
Each common share of the company has one vote by the company’s
One share, one vote right principle 4
policy.
The company allows shareholders to vote by proxy or by using a paper

Proxy voting 4
ballot.
The company tabulates shareowner votes through a third-party entity

Confidential Voting 4
and the audit agent retains its records.
Cumulative Voting 4 The cumulative method is used to elect board members.
Shareholders' right to vote for other company changes are included in

Voting for other company changes 4
the company policy.
Protection of Shareholders Rights
The board nominations are held by the nominee committee of the BoD
Shareholder-sponsored Board Nominations 2 and the shareholders meeting has a right to elect the independent
members.
In the list of issues that can be discussed during the shareholders

Shareholder-sponsored Resolutions 1 meeting, there is no right noted about the shareholder to submit
proposals for considerations at the company’s annual general meeting.
Even though the company is required to receive shareholders approval

Takeover defenses 3 for such measures before implementation, anti-takeover policies are not
sufficient.
AVERAGE SCORE 3.25
OVERALL SCORE 3.23
Source: CFA Institutes, Team estimates

APPENDIX D-2: SOCIAL SCORECARD
Criteria Weightings Score
• E-mail registration of customers to inform them about new products, events, discounts on the official web page
• Focusing intensively on online sales channels, resulting 27% of revenues generated online in 2020
Customer engagement 40 % 3
• Active and Influential social media pages.
• New product collections are released every season
• Although Gobi JSC has been implementing Occupational health and safety management system ISO 45001:2018 standard since
Safety management 20% 2
2019, some serious accidents still occurred such as fire outbreak in 2017 and fatal accident in 2019 at factory.
• Aiming for enhanced and enduring relationship with herding communities within the sustainable cashmere project
• During the pandemic, the company provided food and fuel assistance to 179 household-head employees and civil servants who
Communities 20% 3
were working at hazardous, overloaded conditions.
• A 1,000 MNT of every cashmere coat and jacket sales is spent on donations and charities for the welfare of society.
• Due to the uniqueness of the garment production industry, the company’s female gender ratio is 71%.
Workforce and Diversity • The manufacturing requires an abundant amount of workforce. 20% 2
• The company greatly decreased the number of employees in 2021 by 42% compared to 2019.
Average score 100% 2.6
Source: S&P Global, Team estimates
APPENDIX D-3: ENVIRONMENT SCORECARD

Criteria Weightings Score
• In 2019, 31% of the total waste was recycled and each and every waste was sorted.
• The company uses environmentally-friendly cloth bags which are decomposed in 90 days outdoors instead of plastic bags.
• Only 20-30% of the raw cashmere is pure cashmere and it has lots of natural waste including outer coat of coarse hair therefore
Waste and pollution 40% 2
Gobi donates the waste after its dehairing process to the other felt manufacturers.
• Due to the coloring stage of cashmere products Gobi has chemical waste that can produce certain pollution to the environment
but the company does not have any specific eco-friendly policy on the chemical waste that is open to the public.
• Even though the manufacturing process of cashmere goods requires a tremendous amount of water, and given the situation that
Mongolia is one of the countries that are at risk of facing fresh water crisis, the company does provide any specific information
Water 20% 2
about the use of water and its approach to it.
• The company is installing water recycling equipment in the factory to use recycled water for its manufacturing.
• Gobi JSC has been funding and implementing the Sustainable Cashmere Project that tends to sustain cooperation with herding
communities and prevent possible dangers to rangeland and wildlife such as soil degradation, wildlife extinction with the
partnership of Sustainable Fibre Alliance.
• The “Herders” brand, created as part of the Gobi’s Sustainable Cashmere Project, only makes cashmere goods that only receives
Land use and biodiversity 20% 4
and supports raw cashmere from herders who support the government's policy by restraining the number of goats to protect the
rangeland from degradation.
• Gobi JSC has been implementing a traceability measurement system which helps them to track the process from beginning to end.
• Environmentally-friendly production management system ISO 14001:2015 standard
• The company does not compute the amount of energy consumption for the manufacturing of cashmere goods and there is no
Greenhouse gas emissions research about the company’s greenhouse gas emission intensity. 20% 1
• Gobi JSC does not use any renewable energy source for the manufacturing process.
Average score 100% 2.2
Source: S&P Global, Team estimates
APPENDIX D-4: OVERVIEW OF BOARD MEMBERS

Name Gender Position Education
• Bachelor of Federal Engineer-Economist, Moscow Institute of

• Chairwoman, Independent member of
Telecommunications, Russia
BoD,
GERELMAA Damba Female • Ph.D. in Management, Academy of Management, Mongolia
• Head of the remuneration committee,
• Professor in Business Administration Department, University of Finance and
• Member of the nomination committee
Economics
• Bachelor of Technological engineer of the garment industry, Mongolian

University of Science and Technology, Mongolia
• Independent member of BoD, • Master of Technological engineer of sewing industry, Mongolian University of
BAYAR Myagmar Male
• Head of the nomination committee Science and Technology, Mongolia
• Ph.D in Science of Engineering, ENSISA, France
• Digital fashion, Konkuk University, South Korea, post Ph.D.
• Bachelor of Business Administration,IFE, Mongolia

• Independent member of BoD,
NANDIN-ERDENE Banzragch Male • Master of Business Administration, IFE, Mongolia
• Head of the risk and audit committee
• Master of Marketing Management, Australian National University, Australia
• Independent member of BoD, • Bachelor of Economics, Keio University, Japan

KAMBE Takeshi Male
• Member of the remuneration committee • Master of Economics, Keio University, Japan
• Bachelor of Business Administration, Accounting, IFE, Mongolia

• Bachelors in Applied Accounting, Oxford Brookes University, England
• Independent member of BoD, • ACCA, Accounting and Finance
JARGALMAA, Altangerel Female
• Member of the risk audit committee • Master of Business Administration, Global Management, UFE, Mongolia
• Master of Business Administration and Management, General, Handong Global
University, South Korea
• Member of BoD,
• Bachelor of telegraph engineering, the Polytechnic University of Japan
BAATARSAIKHAN Tsagaach Male • Member of the nomination committee
• Bachelor of electronic engineering, the Denki Tsushin University of Japan
• CEO
• Member of BoD, • Bachelor of International Economics, Moscow Institute of Finance, Russia

KHULAN Dashdavaa Female
• Member of the risk audit committee • Master of Business Administration, National University of Mongolia, Mongolia
• Bachelor of Economics, University of Mainz, Germany

SAWADA Hideo Male • Member of BoD
• President of the H.I.S Corporation
• Bachelor of Research teacher, School of Mongol Studies, National University of

Mongolia, Mongolia
• Member of BoD,
OYUNCHIMEG Javzandolgor Female • Master of Journalism, School of Mongol Studies, National University of
• Member of the remuneration committee
Mongolia, Mongolia
Source: Company data • Master of Business Administration, Academy of Management, Mongolia

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CFA Institute Research Challenge

TICKER: GOV MONGOLIA | MONGOLIAN STOCK EXCHANGE (MSE)

GOV’S OVERVIEW INVESTMENT SUMMARY

Source: Company data, Team estimates

UNIVERSITY OF FINANCE AND ECONOMICS 1

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Source: Team estimates

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Net profit margin TABLE 3: KEY FINANCIAL RATIOS

Company is enduring on the edge because of the future revenue

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FCFF 189 505

EV/EBITDA 188 490 Piotroski F-score 6 5 3 7 7 6

Source: Company data, Team estimates

UNIVERSITY OF FINANCE AND ECONOMICS 7

Source: Team estimates, Refinitiv

Source: Company data, Team estimates

UNIVERSITY OF FINANCE AND ECONOMICS 8

Change Target price Price change

-2% 172.6 -37% 4.75% 5% 5.32% 5.5% 5.75%

Change Target price Price change Monte-Carlo simulation

-2% 131.23 -52% FIGURE 37: MONTE-CARLO SIMULATION

Source: Team estimates, Damodaran INVESTMENT RISK

UNIVERSITY OF FINANCE AND ECONOMICS 9

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APPENDIX A: FINANCIALS APPENDIX B : INDUSTRY AND COMPETITIVE POSITIONING

Appendix A-2: Income statement Appendix B-2: Porter’s five forces

Appendix A-3: Balance sheet Appendix B-3: SWOT analysis

Appendix A-5: Balance sheet assumption APPENDIX C: VALUATION

APPENDIX D: ENVIRONMENT, SOCIAL & GOVERNANCE

Abbreviation Full term Abbreviation Full term

Association of Chartered Certified

APAC Asia Pacific IMF International Monetary Fund

B2B Business to Business ISO International Organization for Standardization

B2B Business to Customer IT Information Technology

BoD Board of Directors KPI Key Performance Indicators

BoF Business of Fashion LLC Limited Liability Company

CAGR Compounded Annual Growth Rate MSE Mongolian Stock Exchange

Organization for Economic Co-operation and

COGS Cost of Goods Sold PCE Private Consumption Expenditure

CSR Corporate Social Responsibility PV Present Value

D2C Direct to Customer RIM Residual Income Model

DCF Discounted Cash Flow ROA Return on Asset

EMEA Europe, Middle East & Africa ROE Return on Equity

EPS Earnings Per Share TTM Trailing 12 months

ERP Equity Risk Premium TV Terminal Value

EV Enterprise Value WC Working Capital

UNIVERSITY OF FINANCE AND ECONOMICS 11

Inflation 2.8% 2.2% 2.9% 2.9% 2.7% 2.6% 2.7% 2.7%

Total 202,378 115,770 136,173 182,524 239,551 313,196 399,250 503,839

Bottom-up approach (60%)

Growth % 34.9% -30.5% 14.5% 11.6% 22.1% 24.0% 25.0% 24.5%

Growth % 3.3% -68.2% 0.3% 0.3% 14.0% 16.8% 18.3% 17.5%

Growth % 20.8% -52.7% 33.3% 15.2% 32.2% 31.9% 28.3% 30.1%

Total 202,378 115,770 135,492 151,082 187,309 235,220 295,057 370,703

Source: IMF, Team estimates

APPENDIX A-2: INCOME STATEMENT