Hengli Hydraulic Earnings: Sales Growth in Nonexcavator Applications Supports Profit

Narrow-moat Hengli Hydraulic's 2023 results indicate underlying strength in its excavator-related business. Sales in hydraulic cylinder and hydraulic pump and valve segments were 2% and 4% above our estimates, respectively, which we attribute to the resilience in excavator-related sales. We think Hengli still face challenges from falling excavator shipment, as reflected in its 21% year-on-year decline in excavator-related revenue in the first quarter of 2024, but we are slightly more optimistic now. After raising our revenue assumption by 5% and gross margin assumption by 106 basis points, we now forecast CNY 2.5 billion in net income for 2024, up 7% from our previous estimate. We have also increased our net income estimates by 2%-9% for 2025-27. We raise our fair value estimate by 10% to CNY 55. The shares closed at an 8% discount to our fair value estimate on April 25, but we would prefer a higher margin of safety before buying.