Accessible version Jiangsu Hengli Hydraulic Co., Ltd (A) Sales growth to accelerate in 2026; expansion in HR; raise PO to RMB130 Reiterate Rating: BUY | PO: 130.00 CNY | Price: 112.50 CNY Sales growth to accelerate in 2026 with improving GPM Hengli's planned production has been solid in Nov-Dec, mainly supported by the robust demand for excavator cylinders. Its excavator cylinder business has been operating at full capacity in 4Q25. Looking into 2026, we expect sales growth to accelerate (16% YoY, vs. 13% Y ...

Summary of Jiangsu Hengli Hydraulic Conference Call Company Overview - **Company**: Jiangsu Hengli Hydraulic Co Ltd - **Industry**: Hydraulic components and systems, specifically focusing on excavator hydraulic cylinders, pumps, and valves - **Market Position**: Leading supplier in China with over 40% market share in excavator hydraulic cylinders [11][40] Key Points and Arguments Financial Performance - **2Q25 Results**: Revenue increased by 11% year-over-year (Y/Y) and net profit rose by 18% Y/Y, both exceeding consensus and historical averages [16] - **Guidance**: FY25 guidance remains unchanged, but there is potential upside for FY27 and beyond due to strong business momentum [17][31] - **Revenue Forecasts**: FY27 revenue estimates increased by 4% and FY28 by 12%, with net profit estimates raised by 3% and 11% respectively [17] Growth Drivers - **Domestic Demand**: Strong recovery in domestic demand, particularly for excavator cylinders, driven by infrastructure projects like the mega-dam and Xinjiang-Tibet Railway [16][22] - **International Expansion**: Orders from Europe and the US are rebounding, with the Mexico plant expected to achieve profitability by 2026, mitigating tariff risks [16][24] - **FA & Robotics Segment**: This segment is projected to be a core growth engine, with potential revenues reaching Rmb4.5 billion by FY28 under the bull case scenario [18][19] Strategic Initiatives - **Diversification**: Since 2022, Hengli has focused on diversifying its business to reduce reliance on excavator products and supply chain concentration [11][40] - **New Product Development**: Expansion into linear motion products and humanoid robotics is expected to contribute to revenue from 2025 onward [11][40][29] Margin and Profitability - **Gross Margin**: 2Q25 gross margin reached 44%, the highest since the 2020 upcycle, with expectations for further improvement as product mix shifts towards higher-value models [16][30] - **Long-term Margin Potential**: Management believes there is no upper limit to margin improvement as new products ramp up and manufacturing efficiency is optimized [30] Risks and Challenges - **Market Risks**: Key risks include lower-than-expected excavator sales volumes, slower market share gains for pumps and valves, and potential trade tensions leading to higher tariffs [42] - **Execution Risks**: The FA & robotics segment faces risks related to slower adoption and execution delays, which could impact revenue growth [19] Additional Insights - **Market Share Expansion**: International markets remain underpenetrated, with significant opportunities for share gains, particularly in Japan and Europe [23] - **Non-Excavator Segments**: Growth in agricultural machinery and new energy segments, with plans for a new plant in Brazil to capture market share [27] - **Aerial Work Platforms**: Currently weak demand, but Hengli is positioned to capitalize on recovery when market conditions improve [28] Valuation - **Price Target**: DCF-based price target raised to Rmb116 from Rmb105, reflecting the bullish outlook on growth and profitability [12][17] - **Valuation Metrics**: The company is expected to maintain strong financial ratios, with a projected revenue growth of 14.6% in FY25 and 19.8% in FY26 [10] This summary encapsulates the key takeaways from the conference call, highlighting the company's strong market position, growth potential, and strategic initiatives while also addressing the associated risks and challenges.