What happened

On December 1, 2024, Huaxin Cement1 released its plan to acquire a 56.04% stake and a 27.77% stake in Lafarge Africa PLC from Holcim Limited for US$560.44mn and US$277.69mn via its wholly-owned subsidiaries Hainan Huaxin Pan-Africa Investment Co., Ltd. and Huaxin (Hong Kong) International Holdings Limited, respectively. After the deal, Huaxin Cement will hold an 83.81% stake in Lafarge Africa PLC. The latter is currently a Nigerian asset of Holcim Limited, with a cement production capacity of 10.6mnt/yr.

Comments

Lafarge Africa PLC delivers solid financial performance. The target company's revenue reached US$452mn in 2023 and US$290mn in 9M24; net profit was US$56.97mn in 2023 and US$36.35mn in 9M24, with annualized 2024 net profit down 15% YoY to US$48.45mn. The impact of the sharp depreciation of the Nigerian naira in 2024 YTD on the company has been limited, as evidenced by a sound debt-asset ratio of 43% at end- 3Q24.

Based on historical data, Huaxin Cement estimates that the enterprise value per tonne cement production capacity in the African market at US$100-150/t. Lafarge Africa PLC has a cement production capacity of 10.6mnt/yr. As a result, its enterprise value is estimated at US$1.06- 1.59bn. Applying an EV/EBITDA multiple of 7x, Huaxin Cement believes Lafarge Africa PLC's enterprise value is US$1.057bn. The consideration for the M&A deal implies 18.6x 2023 and 21.8x 2024e P/E.

Starting to expand in West Africa, a strategically important foothold. Huaxin Cement has been operating businesses in five African countries, i.e., Tanzania, Zambia, Malawi, South Africa, and Mozambique, for many years. On November 292, Mozambique Cement's new clinker production line (with production capacity of 3,000t/day) started trial production.

Huaxin Cement's move to acquire Lafarge Africa PLC at a fair price marks the start of its expansion in West Africa, in our view.

As Africa's most populous country and largest economy, Nigeria's potential demand is growing rapidly, in our opinion. According to Huaxin Cement's corporate filings3, there are three major cement companies in Nigeria and the largest cement company's market share is over 50%, pointing to a sound competitive landscape in the Nigerian cement market. We believe the rebound of cement prices after the sharp depreciation of the Nigerian naira is also attributable to the sound competitive landscape in the local cement market.

The Zambian and Malawian assets that Huaxin Cement acquired from Holcim Limited have delivered solid performance, as Huaxin Cement can add value to these assets through maintaining the balance of these new regional markets and leveraging its advantages in technology and management to reduce costs, improve efficiency, and create synergies.

Notable advantages in overseas expansion; earnings to improve steadily. Huaxin Cement was one of the first Chinese cement companies to expand overseas. It adds one or two overseas production bases per year. As of end-3Q24, the company had production bases in 12 countries across Central Asia, the Middle East, Africa, and Southeast Asia, with clinker production capacity of 15.44mnt/yr and cement grinding capacity of 22.54mnt/yr in overseas markets. In 1-3Q24, its overseas cement and clinker sales volume increased by 41% YoY to 12.05mnt; revenue jumped 49% YoY to Rmb5.94bn; net profit climbed 32% YoY to Rmb847mn.

The company primarily operates production bases in regions where the competitive landscape is stable and demand is strong. We believe the high earnings per tonne of cement in overseas markets can offset the decline in cement earnings in the domestic market. In our opinion, the company's current overseas business development strategy that focuses on M&A and retrofitting can help the company leverage its advantages in technology and management, reduce the impact of its expansion on the supply and demand conditions in local markets, and maintain the competitiveness and profitability of local factories. Overall, we expect earnings of its overseas businesses to increase steadily.

Risks

Uncertainties in the overseas business environment; sharper-than- expected changes to the progress in the M&A deal and/or consideration for the deal; more-volatile-than-expected forex gains and losses.