Hengli Hydraulic Earnings: Product Diversification Drives Decent Sales Growth

Narrow-moat Hengli Hydraulic’s second-quarter results reinforce our view that product diversification will drive growth in the long term. Despite flat sales of the excavator hydraulic cylinder this quarter, sales of the excavator-related pump, valve, and motor grew 66%, and nonexcavator-related sales increased by 26% year on year. Gross profit jumped 43% year on year on a 22% revenue rise and 6.3 percentage points gross margin expansion. As such, we increase our net income forecast by 10% to CNY 2.7 billion for 2024 and by 6%-7% for 2025-28. We raise our fair value estimate by 8% to CNY 59.60. Hengli is slightly undervalued.