Zhixuan Finance APP learned that AXIN International released a research report stating that it maintained a buy rating on Hengguang New Materials International (06616). Considering that the acquisition of the Merck business has not yet been fully implemented and various regional antitrust and mergers and acquisitions approvals are required, the previous profit forecast is temporarily maintained, but it is believed that the company has very good development potential in the future. Net profit for 2024/2025/2026 is expected to be RMB 0.31/0.4/0.51 billion, corresponding to EPS of HKD 0.25/0.32/0.40 (excluding the impact of the acquisition of the Merck business), and the target price is raised to HKD 5.4.

Anxin International's main points are as follows:

Acquisition of Merck's Surface Solutions Business.

Merck has always been a benchmark in the pearl pigment industry. According to Frost Sullivan statistics, Merck's pearl pigment business has a global market share of 22%. Its products are mainly used in automotive-grade and cosmetic-grade materials, which belong to the high-end application category, and have a gross margin leading the industry. The company's revenue in 2022 and 2023 was 0.43 billion euros and 400 million euros respectively, EBITDA was 0.074 billion euros and 63 million euros respectively, and EBITDA margin was 17% and 15% respectively. The net assets in 2023 were 0.32 billion euros. If the acquisition is successful, Hengguang New Material's market share will be greatly increased, and its share in the high-end market will also be significantly increased.

There is great potential for synergy.

This acquisition is beneficial to the company: (i) further expanding the coverage of the main business areas and sales channels; (ii) further enriching the product system and enhancing the competitiveness of the main business; (iii) strengthening the supply chain, realizing synergies, and benefiting customers; and (iv) further improving the level of technological research and development and helping to improve the environment, society and governance.

The transaction valuation is relatively reasonable.

The consideration for the transaction is 660 million euros (equivalent to 5.2 billion yuan), all of which are settled in cash. The EV/EBITDA and PB corresponding to the transaction amount are 10.6x and 2x, respectively. Before the signing of the agreement, the EV/EBTIDA of Hengguang New Material was 12.8x. With reference to comparable companies, the average EV/EBITDA of A-share non-metallic materials companies is 9.6x, and the average EV/EBITDA of US commodity chemical companies is 10.6x. Considering the global position and profitability of Merck's Surface Solutions Business, the bank believes that the valuation level of this transaction is relatively reasonable.

The integration effect is good after the acquisition of CQV.

Hengguang New Material's revenue in 2023 was 1.06 billion, a year-on-year increase of 16%, and the attributable net profit was 0.18 billion, a year-on-year decrease of 18.9%, mainly due to the increase in merger-related expenses. The company completed the consolidation of South Korean CQV in August 2023. The integration process is proceeding smoothly and has shown good synergies. In Q1 2024, CQV's revenue was KRW 14 billion (equivalent to RMB 0.075 billion), a year-on-year increase of 25%, and net profit was KRW 1.85 billion (equivalent to RMB 0.01 billion), a year-on-year increase of 100%. With the production capacity put into operation, the first batch of 6,000 tons of pearl pigment production capacity has landed. The company's original pearl pigment production capacity is 0.018 million tons. The Phase II factory was officially put into operation in February 2024, and the first batch of about 6,000 tons has landed, which can greatly solve the production capacity bottleneck.

Risk reminder: acquisition progress is slower than expected, industry competition intensifies, downstream demand is affected by macroeconomic downturn, and raw material costs rise.