Summary of the Conference Call for Hengli Hydraulic Company Overview - **Company**: Hengli Hydraulic - **Industry**: Hydraulic Equipment Manufacturing Key Points and Arguments Financial Performance - In Q2 2025, Hengli Hydraulic reported a revenue growth of 7% year-on-year, with a quarterly gross margin of 44% driven by revenue increase, cost control, and product mix optimization, particularly in high-margin products like large excavator pumps and valves [2][3][4] - Net profit for Q2 increased by over 18%, with a net profit margin exceeding 29%, indicating strong profitability and financial health [2][4] - Operating cash flow grew by 13.2% year-on-year, reflecting a solid financial position [2][4] Market Performance - Domestic sales increased by 11%, while overseas markets saw a slight decline; however, core customer demand remains positive [2][4] - The production of excavator-specific hydraulic cylinders grew by 16% in the first half of the year, with revenue up by 12% [2][4] - The fastest growth was observed in excavator valves, which surged by 24% [2][4] New Business Development - Over 300 new customers have been onboarded, and a distribution network has been established, with positive market feedback expected to stabilize in the second half of the year [2][7] - The company is focusing on R&D and business connections in the planetary screw rod sector, targeting emerging AI venture capital firms [2][7] International Expansion - Multiple overseas subsidiaries have been established, with production capacity being set up in Mexico and Indonesia [2][8] - The Mexican factory commenced operations in June, contributing approximately 10 million RMB in monthly output [2][25] Investment and Returns - Investment income for the first half of the year was stable at around 160 million RMB, primarily from structured deposits [3][9] - The company utilized hedging strategies to mitigate foreign exchange fluctuations, resulting in a net gain of 187 million RMB from foreign exchange [11] Product Line Performance - Various business segments showed strong performance in Q2, with hydraulic systems growing by 26% and motors by approximately 11% [5][6] - Non-standard hydraulic cylinders faced challenges, particularly in the shield and marine engineering sectors, but showed signs of recovery in June and July [14][15] Future Outlook - The company anticipates a gradual improvement in non-standard hydraulic cylinder business, with positive trends expected in various sectors [15][16] - Capital expenditures for 2025 are expected to be modest, focusing on ongoing projects and equipment upgrades [22][29] Challenges and Risks - The impact of U.S. tariffs on steel and aluminum products is manageable, as these costs are relatively small in the overall cost structure [26] - The company is cautious about brand recognition and product model availability, which may affect revenue expectations for certain products [28] Strategic Goals - Hengli Hydraulic aims to supply foreign clients globally, with a focus on expanding its international market presence [32] - The development in the robotics sector is seen as a catalyst for the company's valuation, with a strong outlook for growth in core manufacturing capabilities [33] This summary encapsulates the key insights from the conference call, highlighting Hengli Hydraulic's financial performance, market dynamics, new business initiatives, international expansion, and future outlook.

Investment Rating - The industry investment rating is maintained at "Add" [1] Core Viewpoints - The direct export cost of engineering machinery to the US has significantly increased due to tariffs, reaching 79% (25% + 20% + 34%), but the overall risk is manageable as the exposure to the US market is low for major manufacturers [1] - Key recommendations focus on companies with North American factories and those with facilities in Mexico (which has tariff exemptions) or Brazil and Turkey (which can bear a 10% tariff) [2] - Companies like SANY Heavy Industry and Hengli Hydraulic have established production capabilities in North America, which can help mitigate tariff risks [2] - The report suggests that the overall risk is controllable despite the tariff impacts, and recommends companies such as SANY Heavy Industry, Zoomlion, LiuGong, Shantui, and Hengli Hydraulic for investment [5] Summary by Sections Tariff Impact - The engineering machinery sector faces a 79% tariff on exports to the US, but major companies have limited exposure, with SANY at approximately 3% and Hengli at about 5% [1] - If retaliatory measures are taken by sanctioned countries, it could benefit Chinese engineering machinery brands, especially in emerging markets [1] Overseas Factory Layout - Companies with North American factories include SANY and Hengli, with SANY's future production capacity expected to exceed 2,000 units, corresponding to about 1 billion yuan [2] - Hengli's North American factory has an annual output value of 300-400 million yuan for hydraulic components, with plans to produce planetary screws if tariffs persist [2] - In Mexico, Hengli and Zoomlion have factories, with Hengli's projected annual output value increasing from 2 billion to 3-4 billion yuan [2] - Zoomlion's factory in Mexico has achieved over 1 billion yuan in actual sales since full production began in Q3 2024 [2] - In Brazil and Turkey, Zoomlion and LiuGong have factories with a combined capacity exceeding 3 billion yuan [2]