2024, the board of directors of Huaxin announced that it planned to invest 186.6 million US dollars to acquire 100% of the shares of EMBU S. A. ENGENHARIA E COMERCIO companies (target companies) from independent third parties. This acquisition is the first time that Huaxin has entered the aggregate business in the South American market. The author will analyze the intrinsic value of Huaxin's acquisition in detail below.
First, Brazil's building materials industry is booming, and the performance of the target company can be expected
. Brazil, located in South America, has a large population. Benefiting from Brazil's domestic economic recovery and increasing population, Brazil's construction and real estate industries have developed rapidly. In the first three quarters of 2024, the GDP of Brazil's construction industry and real estate activities both achieved upward growth. In the first three quarters, the GDP of Brazil's construction industry and real estate activities were 50.155 billion reals and 104.398 billion reals, respectively, up 4.21% and 3.62% year-on-year. Driven by the civilian housing plan of the Brazilian government's Minha Casa Minha Vida ( "My Home, My Life"), the construction and real estate industries will continue to grow, driving the prosperity of the building materials and aggregates industry upward. According to the Brazilian National Association of Building Aggregate Producers (ANEPAC), there are about 3100 companies producing sand and gravel in the Brazilian aggregate industry, and in 2017-2023, the output of Brazilian sand and gravel aggregate (sand + gravel) showed a compound annual growth rate of 4.8%, according to Fernando, president of the Brazilian Sand and Gravel Association. In 2023, the annual output of aggregate in Brazil is about 659 million tons, an increase of 3% over the same period last year. Due to the continuous pull of real estate and infrastructure construction, the output of aggregate in Brazil will continue to rise in 2024, and the performance of the target company can be expected.
Figure 1: Annual aggregate production in Brazil in 2020-2023
Data source: Cement Big Data (https://data.ccement.com/)
II. The target company will substantially increase the production capacity
of Huaxin overseas sand and gravel aggregates. According to the prospectus of Huaxin bonds in August 2024, by the end of 2023, there are 6 production lines of Huaxin overseas sand and gravel aggregates, with a total capacity of 1.72 million years per year. The target company of this acquisition will significantly increase Huaxin's overseas aggregate production capacity by 8.8 million tons per year (the announcement does not explicitly disclose the specific production capacity of four aggregate plants, and the data below comes from the tripartite platform data collected by the author, for reference only).
The target company was established on December 26, 1963 and started operation in June 1964. Its main business includes the production and sale of aggregates and sand products. There are four active quarries in Sao Paulo, Brazil, corresponding to four sand processing plants, with a design capacity of 8.2 million tons per year and an actual capacity of 7.5 million tons per year. There is also a Via Seca sand processing plant in the Embu das Artes region of the state of São Paulo, with a capacity of 150 tons per hour. The target company originally owned a quarry in Sao Paulo, corresponding to a sand and gravel processing plant-Pedreira Paraibuna, with a design capacity of 600,000 tons/year and an actual capacity of 500,000 tons/year, but the quarry was paralyzed, and the target company decided to sell it strategically in 2023.
Table 1: Sand and Gravel Plants
in Operation of the Target Company Data Source: Cement Big Data (https://data.ccement.com/)
III. The target company of Huaxin's
acquisition has strong profitability. In the first nine months from 2021 to 2024, the company's after-tax profits grew rapidly, with 35.6% and 232.3% year-on-year growth in 2022 and 2023. Based on the after-tax profit of 17.133 million US dollars in 2023 and the output of 6.2 million tons in 2023, the after-tax profit per ton of sand and gravel aggregate is 2.76 US dollars/ton (equivalent to about 20.11 yuan/ton at present), far exceeding the profit level of most domestic sand and gravel aggregate enterprises.
Table 2: Profit of the Target Company from 2021 to September 2024 (USD 10,000)
Data source: Cement Big Data (https://data.ccement.com/)
Overview:
From the perspective of industry prosperity According to the analysis of the company's operation and profitability, the acquisition of the target company by Huaxin Cement is reasonable. Moreover, the acquisition is the first charge for Huaxin to open up the building materials industry in the overseas South American market and expand the overseas territory of Huaxin.
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