Update No. 286 – 30/12/16

I am currently traveling in New Zealand, I return in the first week of January. Please review the December Investor Letter to get a brief annual review of how calendar 2016 was for EGP Investors.

Travel is food for the mind in terms of investment and I doubt I have ever spent time traveling without adding something to the investing arsenal. I am very fortunate that my wonderful Wife Sue understands my workaholic leanings and allows me to fit as much work in as I do when I travel (I have snuck out of bed at just after midnight in Queenstown to pen this blog). The thing exercising my mind is tourism generally, and adventure tourism more specifically.

New Zealand, much like Australia has a small population and is benefitting greatly from outbound Chinese tourism. As I commented to my traveling companions, when you’re a country of less than 5 million population, you need only capture very little of the traveling decisions of nearly 1.4 billion Chinese with a burgeoning middle class to create a tourism boom that could have enormous economic effects.

I have also been thinking on the considerable difficulty of balancing the ‘clean and green’ image of NZ with substantial increases in the number of people pushing through any destination. We visited the Fox & Franz Josef glaciers a few days ago; these are an obvious example of a destination that could suffer environmental harms if the tourist throughput is not suitably managed. However, the glaciers have been retreating for over 10,000 years since the last ice age ended and could have as little as one or two hundred years before the retreat is complete. The temptation must be to allow ‘open slather’ tourism to exploit the glacial goods before they melt away. The catch 22 of course is that a big part of the beauty of such destinations is the remoteness and relative lack of tourists. I’m glad I don’t have to make policy on such matters…

But to adventure tourism, I have been trying to decide which of the many businesses operating in this sector here in Queenstown I would most like to own were it possible. So far, I have decided the Jet Boating on the Shotover River would probably be my choice. The operators of Shotover Jet have an exclusive license to operate on the river, and have done so for more than 50 years. Jet boating can be done on almost any body of water, but the narrow rock walls of the Shotover make for an exciting venue that is hard to replicate. The same experience on a lake, or wider river without the sheer rock walls would pale in comparison. There is a limitation to the number of customers that can be pushed through the business, but that gives them enormous pricing power, I expect they will be raising prices at rates exceeding CPI for years and years to come.

The ease with which some other businesses can be replicated is the reason I settled on Shotover Jet. Although I’m sure getting permits takes time and effort, adding new bungee jumping venues, or additional skydiving flights would be relatively simple in comparison, so the pricing power will be not nearly as good. Still others, such as white-water rafting require considerably more maintenance capital, and higher staffing numbers per customer served, so the owners will capture less of any revenue growth as profit. The Gondola ride and Luge would likely be my second choice all else equal, as the assets would be extraordinarily difficult to replicate in anywhere near as advantageous a place, and as such they should have a similar pricing power advantage over a number of other adventure business types.

When you think about listed businesses you would like to own, these are the types of things you should be spending most of your time considering. As one investor friend of mine likes to say, what is the ‘special sauce’? All investors seek to pay less than the underlying assets are worth, but if you can find a business that has truly come to possess a ‘special sauce’, then the chance that you do very poorly out of owning it is meaningfully reduced, even if you overpay.

I hope all the readers of the blog have a joyous New Year’s Eve and a prosperous and happy 2017 and to my fellow EGP investors, I hope to be able to serve you all for the year ahead and for many, many years to come – Tony Hansen 30/12/2016

^{*1 after a 31 May 2013 dividend of 2.333 cents per share (cps) plus 1.000 cps Franking Credit, a 31 May 2014 Dividend of 7.000 cps plus 3.000 cps Franking Credit and a 31 May 2015 Dividend of 8.6667 cps plus 3.7143 cps Franking Credit and a 31 May 2016 Dividend of 6.0000 cps plus a 2.5714 cps Franking Credit}

^{*2 calculated based on dividends reinvested}