Explosive AXA APH potential
Non-institutional investors have not woken up to the amazing growth ahead for AXA APH in China - and the instos just don't care. That's why AXA France may win the Asian assets at a bargain price.
Jetstar group executive Bruce Buchanan has produced an amazing manifesto for the long term strategies of Australian companies by setting out what is going to happen in China and the rest of Asia in the next decade. Buchanan explains how Jetstar has emerged as the largest low-cost carrier in the region, with a plan to take advantage of this position and drive incredible expansion.
But what a damning document the Jetstar chief presents for Australian companies and our wooden-headed, short-term obsessed institutions who have opposed expansion into Asia by Australian companies because the returns take too long.
Buchanan can only come up with three Australian non-resource companies who are taking advantage of the high growth of China and Asia – BlueScope, ANZ Bank and Boost Juice.
In fact the Jetstar chief left out the biggest Australian non-resource growth story of all – AXA Asia Pacific which many years ago with the help of the Australian government brilliantly negotiated the rights to spearhead AXA France's Asia push.
I want every AXA Asia Pacific director, every AXA non-institutional shareholder and any institution that is prepared to think more than six months ahead (there are not many) to read the Buchanan address. But try replacing "aviation” with "life and savings products”. You can read the Buchanan speech here, but for the sake of argument I will substitute those terms myself below – I hope Bruce will forgive me :
Buchanan (altered):
"Let's step forward in time to 2020 – less than a decade away. And the Asian region has leap-frogged the rest of the world to become the economic centre of the world once again. This is an outcome of the two-speed world in which we live today.
"In China and India alone, 320 million people will join the middle class within the next 5 years. As people enter the middle class we see a real 'inflection' point in demand for savings and life products.
"If you consider economies of individual cities within these large countries it is clear that in more affluent areas GDP growth will reach levels that accelerate the take up of savings and life products far sooner than the national averages would suggest.
"In China alone over 200 cities will reach this threshold in the coming years. This will lead to the savings and life product market growth rates of approximately 20 percent in Asia over the next few years."
In fact, for AXA Asia Pacific, Buchanan view of Asia understates the potential. AXA Asia Pacific is growing much faster than 20 per cent a year in Asia and is set to grow at an even faster rate.
The key to AXA's high growth is that the Australian company has learned the same lesson as Jetstar – you must tailor your strategies for different Asian markets. AXA will grow much faster than Jetstar because AXA CEO Andy Penn has secured the most remarkable deal ever pulled off by a non-resource company in Asia. AXA Asia Pacific in China is currently classed as a foreign company and must fight against global giants for just 5 per cent of the market, which is all the foreigners are allowed to have. Under this scenario you can't win.
But Penn has joint ventured with China's largest bank, the Industrial and Commercial Bank of China (ICBC) and although that reduces the Australian company's stake to around 14 per cent, AXA is now a "local company” and can go for the whole market. No Australian non-resource company has ever had this opportunity.
Better still, Penn and his people at AXA Australia have achieved enormous growth rates in Asia because they have discovered how to joint venture with an Asian bank in Indonesia. That gives them a wonderful chance to do the same thing in China.
The ink on the China agreement is barely dry and it will take a few years before we start seeing AXA Asia growth rates move to stellar levels.
In just over 12 months AXA France chief Henri de Castries has been forced to lift his bid for the Asian part of AXA Asia Pacific from $8.2 million to $10.4 billion. Each half year AXA management tell their shareholders what their Asia business is worth by using internationally recognised actuarial calculations.
Between December 2008 and December 2009 the value of AXA Asia soared 38 per cent from $8 billion to $11.1 billion. In the next six months to June 30 2010 it rose just under 12 per cent to $12.4 billion so it's on track to rise 25 per cent for the year to December 31 which would take the value to $14 billion by June 30 2011.
It would then be in a position fulfill Andy Penn's forecast to the AXA board that he could make AXA Asia worth $16 billion by 2012 – all without the China joint venture boost.
AXA France is offering just $10.4 billion for AXA Asia. In fairness, the $16 billion 2012 value must be reduced by minority interests, so let's reduce it to $14 billion including the China potential.
AXA France is getting AXA Asia for a small fraction of its worth. And remember it has this worth because the Australian government insisted that the Australian company have the Asian rights when AXA acquired a majority stake.
It's true that AXA directors a year ago recommended an offer of $9.6 billion from AXA France for the Asian operation. But so much has happened since then that the offer now looks crazy – unless you look at the AXA Asia Pacific share price, where the non-institutional shareholders do not understand what has happened and the institutional shareholders could not care less – they just want a quick quid.
But I fear the fight may have gone out of the AXA independent directors. Henri may have worn them down.
But what a damning document the Jetstar chief presents for Australian companies and our wooden-headed, short-term obsessed institutions who have opposed expansion into Asia by Australian companies because the returns take too long.
Buchanan can only come up with three Australian non-resource companies who are taking advantage of the high growth of China and Asia – BlueScope, ANZ Bank and Boost Juice.
In fact the Jetstar chief left out the biggest Australian non-resource growth story of all – AXA Asia Pacific which many years ago with the help of the Australian government brilliantly negotiated the rights to spearhead AXA France's Asia push.
I want every AXA Asia Pacific director, every AXA non-institutional shareholder and any institution that is prepared to think more than six months ahead (there are not many) to read the Buchanan address. But try replacing "aviation” with "life and savings products”. You can read the Buchanan speech here, but for the sake of argument I will substitute those terms myself below – I hope Bruce will forgive me :
Buchanan (altered):
"Let's step forward in time to 2020 – less than a decade away. And the Asian region has leap-frogged the rest of the world to become the economic centre of the world once again. This is an outcome of the two-speed world in which we live today.
"In China and India alone, 320 million people will join the middle class within the next 5 years. As people enter the middle class we see a real 'inflection' point in demand for savings and life products.
"If you consider economies of individual cities within these large countries it is clear that in more affluent areas GDP growth will reach levels that accelerate the take up of savings and life products far sooner than the national averages would suggest.
"In China alone over 200 cities will reach this threshold in the coming years. This will lead to the savings and life product market growth rates of approximately 20 percent in Asia over the next few years."
In fact, for AXA Asia Pacific, Buchanan view of Asia understates the potential. AXA Asia Pacific is growing much faster than 20 per cent a year in Asia and is set to grow at an even faster rate.
The key to AXA's high growth is that the Australian company has learned the same lesson as Jetstar – you must tailor your strategies for different Asian markets. AXA will grow much faster than Jetstar because AXA CEO Andy Penn has secured the most remarkable deal ever pulled off by a non-resource company in Asia. AXA Asia Pacific in China is currently classed as a foreign company and must fight against global giants for just 5 per cent of the market, which is all the foreigners are allowed to have. Under this scenario you can't win.
But Penn has joint ventured with China's largest bank, the Industrial and Commercial Bank of China (ICBC) and although that reduces the Australian company's stake to around 14 per cent, AXA is now a "local company” and can go for the whole market. No Australian non-resource company has ever had this opportunity.
Better still, Penn and his people at AXA Australia have achieved enormous growth rates in Asia because they have discovered how to joint venture with an Asian bank in Indonesia. That gives them a wonderful chance to do the same thing in China.
The ink on the China agreement is barely dry and it will take a few years before we start seeing AXA Asia growth rates move to stellar levels.
In just over 12 months AXA France chief Henri de Castries has been forced to lift his bid for the Asian part of AXA Asia Pacific from $8.2 million to $10.4 billion. Each half year AXA management tell their shareholders what their Asia business is worth by using internationally recognised actuarial calculations.
Between December 2008 and December 2009 the value of AXA Asia soared 38 per cent from $8 billion to $11.1 billion. In the next six months to June 30 2010 it rose just under 12 per cent to $12.4 billion so it's on track to rise 25 per cent for the year to December 31 which would take the value to $14 billion by June 30 2011.
It would then be in a position fulfill Andy Penn's forecast to the AXA board that he could make AXA Asia worth $16 billion by 2012 – all without the China joint venture boost.
AXA France is offering just $10.4 billion for AXA Asia. In fairness, the $16 billion 2012 value must be reduced by minority interests, so let's reduce it to $14 billion including the China potential.
AXA France is getting AXA Asia for a small fraction of its worth. And remember it has this worth because the Australian government insisted that the Australian company have the Asian rights when AXA acquired a majority stake.
It's true that AXA directors a year ago recommended an offer of $9.6 billion from AXA France for the Asian operation. But so much has happened since then that the offer now looks crazy – unless you look at the AXA Asia Pacific share price, where the non-institutional shareholders do not understand what has happened and the institutional shareholders could not care less – they just want a quick quid.
But I fear the fight may have gone out of the AXA independent directors. Henri may have worn them down.
Note: my earlier comments on AXA are The great AXA APH steal November 15; Pricing AXA APH's goldmine, November 9, The price just went up for AXA APH, October 29).
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