occurrences

Huaxin Cement plans to finally acquire 56.04% and 27.77% of the shares of Haowei Nigeria's assets Lafarge Africa Plc through two wholly-owned subsidiaries, Hainan Huaxin Pan Africa Investment Co., Ltd., and Huaxin (Hong Kong) International Holdings Co., Ltd. at the price of 0.5604 billion US dollars and 0.2777 billion US dollars respectively. After the transaction is completed, Huaxin Cement will control 83.81% of Lafarge Africa Plc's shares. The company owns 10.6 million tons cement production capacity per year.

reviews

The target company's financial performance was solid. The final target company's revenue for January to September 2023/2024 was 0.452 billion/0.29 billion US dollars, respectively, and net profit was 56.97 million/36.346 million US dollars (annualized to 48.453 million US dollars in 2024, down 15% year on year). The impact of the sharp depreciation of the Nigerian naira in 2024 was relatively limited. The balance ratio at the end of 3Q24 was 43%, which is also at a relatively stable level. According to historical data, the company calculated that the enterprise value per ton of cement production capacity in the African market was 100-150 US dollars/ton. The target company's 10.6 million tons/year cement can be reasonably valued at between 1.06-1.59 billion US dollars. The company calculated a 7-times EV/EBITDA ratio. The final enterprise value of the target company was estimated at 1.057 billion US dollars, and the 2023/2024e P/E corresponding to the acquisition was 18.6x/21.8x, respectively.

Take the first step in operating overseas in West Africa and establish an important strategic fulcrum. The company has been deeply involved in five African countries (Tanzania, Zambia, Malawi, South Africa, and Mozambique) for many years. On November 29, the Mozambican cement company ignited a 3,000-ton clinker production line for trial production. This time, it also took over the high-quality assets of major shareholders at a reasonable price to build the first bridgehead in West Africa. We believe that Nigeria, as the most populous country and the largest economy in Africa, is growing rapidly; moreover, according to the company announcement, Nigeria has three main cement companies, with a share of more than 50%, and the supply pattern is relatively good. We believe this is also the main reason why cement prices in the Nigerian region have successfully rebounded sharply after the sharp devaluation of the naira. Furthermore, the company previously took over Horizon's assets in Zambia and Malawi, and the operating efficiency is good. The core reason is that the company can use its technical and management advantages to drastically reduce costs and increase efficiency and create synergy effects on the premise of maintaining balance in newly entered regional markets, thus achieving considerable mergers and acquisitions.

The advantages of pioneers going overseas are obvious, and the benefits are expected to rise one level. The company is one of the pioneers of domestic cement companies going overseas. On average, 1-2 new bases are added overseas every year. As of 3Q24, the company has been deployed in 12 countries in Central Asia, the Middle East, Africa and Southeast Asia. The overseas clinker production capacity is 15.44 million tons/year, and the cement grinding capacity is 22.54 million tons/year. In the first three quarters of 24 years, the company sold 12.0463 million tons of cement and clinker (+41% year over year), achieving operating income and net profit of 5.936/0.847 billion yuan, respectively, an increase of 49%/32% year-on-year. Most of the company's production capacity is located in regions where the market pattern is stable and demand is relatively strong. Overseas profits per ton are rich, forming a good complement against the backdrop of declining domestic cement profits. We believe that the company has now established an overseas development strategy centered on mergers and acquisitions, and is trying to maximize its management and technical advantages, control the impact on the supply and demand pattern of the local market to the greatest extent possible, maintain the competitiveness and profitability of local factories, and the overall benefits of overseas business are still expected to rise.

risks

The overseas business environment is uncertain, transaction progress/price considerations exceed expectations, and exchange rate fluctuations exceed expectations.