恒立液压：3Q24 earnings below expectations due to margin contraction

Investment Rating - The report maintains a "BUY" rating for Jiangsu Hengli with a target price of RMB64, indicating a potential upside of 14.7% from the current price of RMB55.82 [2][4]. Core Insights - Jiangsu Hengli's EBIT in 3Q24 decreased by 6% YoY to RMB445 million, attributed to a gross margin contraction of 1.9 percentage points YoY, despite an 11% YoY revenue increase to RMB2.1 billion [2]. - The net profit for 3Q24 grew by 6% YoY to RMB504 million, supported by higher net finance income and other gains [2]. - The company is expected to benefit from increasing revenue contributions from non-excavator components and new growth drivers such as electric cylinders and ball screws in 2025 [2]. - The report highlights potential risks related to the upcoming U.S. elections and possible tariff increases under a potential Trump presidency, which could impact exports from Mexico to the U.S. [2]. Financial Summary - Revenue for FY24E is projected at RMB10,033 million, reflecting an 11.7% YoY growth, with further growth expected in FY25E and FY26E [3][13]. - Adjusted net profit for FY24E is estimated at RMB2,756.5 million, with an EPS of RMB2.06, representing a 10.3% YoY increase [3][13]. - The gross margin is expected to improve slightly to 41.9% in FY24E, with a long-term target of 43.0% by FY26E [10][16]. Production and Operational Insights - The production plan for October includes 42,000 units of hydraulic cylinders for excavators, a decrease of approximately 5% YoY, while production of non-standardized cylinders is expected to drop by about 10% YoY [2]. - Positive production trends are noted for small-size pumps and valves, with planned increases of approximately 40% and 90% YoY, respectively [2]. Market Position and Valuation - The company maintains a strong market capitalization of RMB74,844.6 million, with a P/E ratio projected to decrease from 31.1x in FY22A to 21.4x in FY26E [4][10]. - The report indicates a stable financial position with a net gearing ratio improving from (51.9%) in FY22A to (52.4%) in FY26E, suggesting a strong balance sheet [3][10].