Hengli’s net profit in 1H20 grew 47% YoY to RMB986mn, implying an impressive net profit growth of 85% YoY in 2Q. Gross margin of 44.5% in 2Q is a record high, suggesting high utilization rate and strong pricing power. We revised up our earnings forecast in 2020E-22E by 5-8% (12-15% above consensus), after incorporating higher gross margin assumption and lower expense ratios. After rolling over the valuation base to 2021E, we raised our TP to RMB82 based on unchanged multiple of 45x P/E. We believe the fast-growing pump and valve sales will continue to lend support to the valuation. Maintain BUY.
- Key highlights on 1H20 results. Revenue grew 24% YoY to RMB3.46bn and gross margin significantly expanded 4.9ppt YoY to 41.9%. This, coupled with lower SG&A ratios, boosted the net profit growth of 47% YoY. Operating cash inflow in 1H20 increased by 19% YoY to RMB944mn. In 2Q20, net profit surged 85% YoY to RMB639mn, mainly driven by 71% YoY increase in revenue and 4.6ppt YoY gross margin expansion (to 44.5%).
- Solid sales growth in 1H20. Sales volume of hydraulic cylinder for excavator grew 27% YoY 330k units. The segment revenue grew 16% YoY to RMB1.4bn, a result of lower ASP due to higher demand for small-size excavators. Hydraulic Technology, the major subsidiary with a focus on hydraulic pump and valve, reported revenue growth of 86% YoY. Revenue of non-standardized hydraulic cylinders dropped 9% YoY to RMB577mn.
- Production volume staying high in Jul & Aug. Based on our understanding, Hengli’s monthly production volume reached 53k units in Jul and is expected to reach 54k units in Aug. Such monthly volume suggests strong downstream demand. Besides, production volume of pumps and valves are expected to stay high in 3Q.
- Key risks: (1) Slowdown of construction activities; (2) risk of overseas expansion; (3) increase in raw materials cost.
