Hengli’s released a positive profit alert yesterday stating that the net profit in 2020E is expected to surge 58%-77% YoY to RMB2.05-2.30bn. The mid-point (RMB2.17bn) is in line with our estimate of RMB2.18bn but higher than the consensus of RMB2.06bn. We believe it is a positive surprise to the market. We revised up Hengli’s earnings forecast in 2021E/22E by 4%/6% (9%/7% above consensus), after revising up our sales volume assumption. We believe the next catalyst will come from a strong 1Q21E sales. We raise our TP to RMB143, based on 65x 2021E P/E (50% premium to the historical average of 43x).
- Profit surprise in 2020E. Hengli’s net profit in 2020E is expected to surge 58%-77% YoY to RMB2.05-2.3bn. This implies net profit of RMB575-828mn in 4Q20, up 52%-118% YoY. The earnings growth was driven by strong downstream demand (excavator) that boosted the sales of hydraulic cylinders, pump and valve, market share gain, as well as the reduction of SG&A expense ratio.
- We forecast a solid growth of excavator demand in 2021E. For the industry as a whole, major manufacturers of excavator delivered sales volume of 328k units in 2020, up 39% YoY, according to CCMA. In 4Q20, excavator sales grew 61% YoY. In 2021E, we expect excavator demand to grow 10% YoY (industry), driven by infrastructure spending growth, continuous trend of the substitution of labour and wheel loaders.
- We expect Hengli to deliver strong sales in 1Q21E. We estimate Hengli production volume of hydraulic cylinder (for excavator) to surge 75% YoY in Jan. Besides, we expect the production volume of pump, valve and motor to remain strong. Based on our new assumptions, we forecast Hengli’s sales volume of hydraulic cylinder (for excavator) to grow 20% YoY in 2021E, while sales volume of pump and valve to grow 40% YoY.
- Structural growth trajectory remains solid. We forecast Hengli’s market share in hydraulic cylinder to increase from 50% in 2020E to 59% in 2022E. Besides, we expect pump & valve for large-size excavators, as well as non-standardized hydraulic components for various industries will serve as key drivers over the coming few years.
- Key risks: (1) Slowdown of construction activities; (2) risk of overseas expansion; (3) increase in raw materials cost.
