Huaxin Cement announced that it plans to acquire 83.81% of Lafarge AfricaPLC's shares from HOLCIM for US$0.838 billion in cash. The consideration implied a corporate value of 7.0x EV/EBITDA (2023) or 100 US dollars/ton cement (2023 production capacity). The deal is still subject to approval by the shareholders' meetings, administrative authorities of the two countries, etc. We believe that the acquisition plan further demonstrates the company's determination to increase overseas development and improve its internationalization strategy, and is expected to further utilize the company's rich experience in overseas project operations over the past 10 years. We are optimistic that the company's domestic market and overseas development will resonate in 2025, and reaffirm the “buy” ratings of Huaxin Cement-A and Huaxin Cement-H.

The target of the proposed acquisition is one of the leading cement industry leaders in Nigeria

By the end of 2023, Lafarge Africa Plc had 10.6 million tons/year of cement and 400,000 tons/year mixed production capacity in Nigeria. According to ICR data, Lafarge Africa Plc, Dangote (cement production capacity of about 30 million tons/year) and BUA (cement production capacity of about 11 million tons/year) are leading cement companies in Nigeria. Nigeria is the most populous country in Africa (0.22 billion in 2023). According to the ICR, the per capita cement consumption in 2021 is 138 kg, and there is plenty of room for improvement. Nigeria's urbanization rate of 54.3% in 2023 (World Bank data) has increased rapidly in recent years (an average annual increase of 0.8 percentage points over the past 5 years). We estimate that Lafarge Africa Plc's gross profit per ton of cement in 2023 is about 24 US dollars/ton, which is slightly lower than the average gross profit per ton (28 US dollars/ton) of Huaxin Cement's overseas projects in 2023.

Overseas development has become an important growth engine for Huaxin Cement

By the end of September 2024, the company had production lines in 12 overseas countries including Central Asia, Southeast Asia, the Middle East and Africa, accounting for 21% of overseas clinker production capacity. 9M24 overseas cement clinker sales volume was +41% year-on-year, and overseas market profit after tax accounted for 54%. The breadth of the company's overseas market layout and the profitability of overseas projects are ahead of its domestic peers, and overseas development has become an important driving force for the company's growth. If the acquisition of Lafarge Africa Plc is completed, the company's overseas cement production capacity is expected to exceed 33 million tons/year, and it is also expected to lead domestic peers in terms of overseas production capacity.

Domestic and foreign markets are expected to recover in 2025, and domestic and foreign markets are expected to resonate as consensus in the cement industry is consolidated, false peak production increases, and overcapacity management drives more production capacity. We expect the cement industry to gradually optimize on the supply side in 2025, the center of domestic cement prices is expected to rise, and the company's domestic and foreign cement business is expected to resonate in 2025. Maintain Huaxin Cement's 2024/2025/2026 EPS forecast of 1.04/1.29/1.35 yuan, and raise the target price of Huaxin Cement-A by 3.4% to 15.73 yuan, based on 12.2x2025 P/E (previous value 11.8x), which is consistent with comparable overseas companies. The target price of Huaxin Cement-H was raised by 1.4% to HK$10.09, based on 7.2x2025 P/E (previous value 7.1x), which is 29% lower than the average of Huaxin Cement-A since 2010 (in line with the average premium of cement company A-H).

Risk warning: The real estate market is steady and slower than expected, production execution is weaker than expected, and the company's overseas development is slower than expected.