Henry joined Platinum in April 2019 as an Investment Specialist. Prior to this, Henry worked at Goldman Sachs where he held the position of Executive Director, Australian.. More
Platinum’s philosophy of “thinking differently” means we look for opportunities that are out of favour and against popular opinion. This involves looking for investments in areas undergoing considerable change. It also nearly always involves feeling uncomfortable at the point of initial purchase, with the most recent and clearest example being our investment in travel and travel-related industries throughout 2020.
In our June 2020 quarterly report, CIO and CEO Andrew Clifford disclosed that travel had become a key theme in the flagship global equity portfolio, concluding that “... our view is that travel will return to favour in time and that the advent of an effective vaccine will facilitate a recovery”. Indeed, the announcement of a successful vaccine candidate lit a match under the share prices of many travel-related stocks, but the speed at which this took place in November was a reminder that if you wait until these types of announcements are made, you can often miss a significant amount of the return opportunity. For example, if you had waited until the Pfizer/BioNTech vaccine announcement on 9 November 2020 to purchase Booking Holdings, you would have already missed the 84% bounce from the stock’s 23 March 2020 low.
If we use the historical base rate of growth of 5.6% p.a., will COVID-19 change this? There are two major issues to consider: Firstly, confidence in travelling safely; and secondly, the likelihood of corporate traveller demand falling due to the universal adoption of video calls.
On the issue of travelling with confidence, while this will repair in time, clearly a vaccine/therapeutic was required for more rapid improvement in sentiment. The research and insights from our healthcare portfolio manager and resident virologist Dr Bianca Ogden, gave us strong confidence that a vaccine would be available in 2020 and faster than the market was anticipating. This proved to be true.
On the issue of video calls replacing corporate travel, as noted by portfolio manager Clay Smolinski in the June 2020 quarterly report, we have no doubt that certain categories of business travel will be reduced but face-to-face contact is an essential part of most industries’ sales process. Once we segmented corporate travel by purpose, we assumed video calls would displace 20-25% of corporate travel, which given corporate travel is roughly 30% of total travel by passengers, would result in the total market shrinking by approximately 8%.
Using these numbers we felt that even if the industry rebased lower, there were good reasons to believe it would return to trend growth and any lost ground would be made up swiftly once confidence returns. That gave us the assurance and motivation to look for specific companies to invest in, while the market continued their overreaction.
Stepping from this industry view to the fortunes of specific companies, it’s important to remember the travel industry is incredibly diverse and we can be very selective in the types of businesses in which we invest. Some of our investments have very attractive industry economics, two or fewer competitors and strong growth prospects. The businesses must also have the financial capacity to withstand a couple of turbulent years if necessary.
This led us to invest in capital-light internet booking platforms and software providers, such as online travel agents (OTA) Booking Holdings (the world’s largest and owner of Booking.com, Priceline and OpenTable among others) and Trip.com. Both companies have significant cash buffers to weather the storm, primarily serve leisure customers where there are no disintermediation concerns, help hotels fill unsold rooms and have seen their competitive positions improve as smaller peers have exited.
Trip.com is China’s largest OTA, making the bulk of its profit via commissions from selling hotel rooms and flights. Today, China is the largest outbound tourist market in the world, with 75 million outbound flights in 2019 (excluding Hong Kong and Macau), growing at 15% p.a. The growth potential becomes apparent when noting that less than 15% of Chinese nationals hold a passport. They clearly desire to travel and already Chinese domestic air travel is back to pre-COVID levels. With the tailwind of market growth, we believe that Trip.com can grow strongly for many years. Due to the COVID-19 crisis we were able to invest in this stock at 13x 2019 earnings.
Another stock that we purchased on the March lows was Amadeus IT Group - a technology provider to the global travel and tourism industry. The economics of its Global Distribution System (GDS) are excellent. There are just three providers, high barriers to entry and fragmented customers and suppliers. Amadeus adds value to the travel industry in two ways. Firstly, it helps travel providers, primarily airlines, to sell in the most efficient way, through a large network of traditional and online travel agencies. Its core technology enables real-time search, pricing, booking and ticketing. It leads with 44% market share versus the weaker peers, Sabre and Travelport. Secondly, Amadeus helps airlines, hotels and airports to run various business-critical processes (reservations, inventory, departure controls), saving them money by transforming a fixed cost into a variable cost. Given the volatile nature of their business, airlines prefer to pass on their fixed costs and simply pay c. €1 (A$1.60) per passenger to Amadeus instead for their services. Amadeus invests heavily in research and development (R&D) and provides their systems for a fraction of what each airline would need to spend.
COVID-19 has had a dramatic impact on travel-related businesses and Amadeus has not been immune. But again, here was the opportunity. If you can look through the short-term business deterioration and have confidence that people will eventually travel again, in our view, Amadeus should emerge as an even stronger player against its competitors and new entrants. Reflecting the attractive industry economics of these two business segments, Amadeus made a 28% operating margin and 18% return on capital over the last decade. Profits tripled over the same period. With growth tied to passenger volumes, short-term assumptions of a longer-term issue by the market allowed us to invest in this great business at 16x 2019 earnings.
In conclusion, a number of our travel holdings have performed exceptionally well since their March lows, with the vaccine announcement in early November giving them additional impetus. We are now seeing more interest in the sector, after it has recovered significantly. This is giving us the chance to reduce and even exit some of our travel exposure into this strength. This is the Platinum process at work. It requires a contrarian mindset, a willingness to do the research early, being ready to seize the opportunity in a crisis and look to sell and recycle this capital into the next emerging idea as consensus plays catch up.
DISCLAIMER: This article has been prepared by Platinum Investment Management Limited ABN 25 063 565 006, AFSL 221935, trading as Platinum Asset Management (“Platinum”). This information is general in nature and does not take into account your specific needs or circumstances. You should consider your own financial position, objectives and requirements and seek professional financial advice before making any financial decisions. You should also read the latest relevant product disclosure statement before making any decision to acquire units in any of our funds, copies are available at www.platinum.com.au. Past performance is not a reliable indicator of future results. Some numbers have been rounded. The commentary reflects Platinum’s views and beliefs at the time of preparation, which are subject to change without notice. No representations or warranties are made by Platinum as to their accuracy or reliability. Commentary may also contain forward-looking statements. These forward-looking statements have been made based upon Platinum’s expectations and beliefs. No assurance is given that future developments will be in accordance with Platinum’s expectations. Actual outcomes could differ materially from those expected by Platinum. To the extent permitted by law, no liability is accepted by Platinum for any loss or damage as a result of any reliance on this information.
We use technologies, such as cookies, and process personal information, such as IP addresses and cookie identifiers,
to analyse traffic to our site, personalise advertisements and content based on your interests, measure the performance
of our advertisements and content, derive insights about the audiences who visit our site and see our advertisements
and content, and to build target audiences on social media. We share this information with our social media and analytics
service providers. Click on the adjacent button to consent to the use of this technology and the processing of your
We use technologies, such as cookies, and process information, such as IP addresses and cookie identifiers, to personalise
advertisements and content based on your interests, measure the performance of our advertisements, derive insights about audiences
who see our advertisements, and to build target audiences on social media. We share this information with our social media and
analytics service providers. Click on the adjacent button to consent to the use of this technology and the processing of your
Some cookies are needed to make our website work and can't be turned off. But we need your consent to use others that are not essential.
These cookies are needed to run our website and to enable your device to move from page to page without having to log in repeatedly.
These cookies remember your region or country, language, accessibility options and your settings. This also includes
things like your User ID on the logon page
These cookies tell us how customers use our website. We study and profile this data to help us improve our products and performance.
These cookies help us decide which products, services and offers may be relevant for you. We may use this data
to tailor the ads you see on our own and other websites and apps. We may also use this data to build target
audiences on social media. We share this information with our social media and analytics service providers.