Strong sales but short-term profit pressure, with robotics and aerospace businesses supporting medium- to long-term growth

Overview

This report is Deutsche Bank's earnings review and 1Q26E preview for Hengli Hydraulic. The report believes that the company's sales performance remains strong, with 4Q25 revenue exceeding expectations and 1Q26E also likely to maintain about 28% YoY growth; however, short-term profits are dragged down by foreign exchange losses caused by RMB appreciation, gross margin pressure, inventory write-downs, and losses from the Mexico plant fire. Even so, the report still lists Hengli Hydraulic as one of its top sector picks for 2026, due to the recovery of construction machinery markets in China and overseas, confirmed positioning in the humanoid robot supply chain, and long-term growth potential in bionic robot and aerospace applications.

Core views

The core view is that the short-term pattern of 'strong revenue, weak profit' will continue, but underlying operating quality has not materially deteriorated. 4Q25 revenue was RMB3.15bn, up 28% YoY, with hydraulic pumps and hydraulic cylinders growing 37% and 20%, respectively; net profit was RMB647mn, down 10% YoY, below market expectations. The report judges that, excluding factors such as foreign exchange losses, inventory write-downs, and fire losses, underlying net profit in 4Q25 exceeded RMB900mn, up more than 30% YoY. For 1Q26E, revenue is expected at RMB3.1bn, up 28% YoY, and net profit at RMB524mn, down 15% YoY, but excluding foreign exchange losses, profit can still achieve healthy growth. Over the medium to long term, the recovery in construction machinery, humanoid robot ball screws, linear actuators, bionic robots, and aerospace hydraulic systems form new valuation support.

Analysis framework

The report uses a combination of earnings decomposition, management guidance, regional and business segment growth assessment, industry demand comparison, and segment valuation. Short-term profitability analysis focuses on distinguishing operating growth from one-off or non-operating disruptions; for valuation, it adopts the SOTP method, valuing the mature construction machinery hydraulics business separately from high-growth businesses such as robotics, bionic robots, and aerospace.

Methodology notes

• Valuation methodsSOTP

  Sum-of-the-parts valuation

  The report breaks down the target price into RMB87 for the core business, RMB30 for humanoid robots, RMB4 for bionic robot arms and legs, and RMB3 for aerospace, totaling a target price of about RMB124.

• Valuation methodsP/E valuation

  Price-to-earnings valuation

  The core business uses 36x 2026E P/E, above the company's long-term average one-year forward P/E of 31x, on the basis that accelerated growth in 2026E can support a higher valuation.

• earnings_qualityadjusted earnings analysis

  Profit analysis excluding one-off factors

  The report distinguishes factors such as foreign exchange losses, inventory write-downs, and losses from the Mexico plant fire from underlying operating performance, and believes adjusted underlying net profit in 4Q25 exceeded RMB900mn.

• industry_read_acrossread-across analysis

  Peer risk mapping

  The report notes that companies with a high share of overseas revenue, such as Sanhua Intelligent Controls, may face similar foreign exchange losses in 4Q25E and 1Q26E.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Hengli Hydraulic (601100.SS)

  Covered company and core recommended name

  Strengths

  Leader in hydraulic components for construction machinery, with 4Q25 revenue up 28% YoY; 2025 revenue exceeded RMB10bn; has entered the supply chain of a leading international humanoid robot manufacturer and has industrial precision machining capabilities.

  Weaknesses

  Short-term profit is affected by foreign exchange losses, gross margin pressure, inventory write-downs, and losses from the Mexico plant fire; the industrial precision business remains small and was loss-making in 2025.

  Comparison

  Currently trading at 2026E P/E of 40.1x and 2027E P/E of 33.1x, above the long-term average one-year forward P/E of 31x; the report believes accelerated growth and optionality from new businesses support a higher valuation.

  Risks

  High U.S. tariffs on imports from China and Mexico, insufficient recovery in global excavator sales, slower orders from humanoid robot and machine tool customers, and lower-than-expected growth in linear products.

• Sanhua Intelligent Controls

  Foreign exchange risk comparable company

  Strengths

  Mentioned in the report only as a foreign exchange risk reference for companies with higher overseas exposure.

  Weaknesses

  If RMB appreciation continues, similar foreign exchange losses may occur in 4Q25E and 1Q26E.

  Comparison

  Similar to Hengli Hydraulic, overseas exposure may make profits sensitive to exchange rate fluctuations.

  Risks

  Exchange rate fluctuations may cause non-operating disruptions to short-term profits.

Key data

• 4Q25 revenueRMB3.15bn, +28% YoYRevenue growth exceeded market expectations, with hydraulic pumps and hydraulic cylinders growing 37% and 20% YoY, respectively.
• 4Q25 net profitRMB647mn, -10% YoYBelow market expectations, dragged down by costs, foreign exchange losses, inventory write-downs, and fire losses.
• 4Q25 adjusted underlying net profitExceeding RMB900mn, +30%+ YoYExcluding one-off factors such as foreign exchange losses, inventory write-downs, and losses from the Mexico plant fire.
• 2025 revenueRMB10.9bn, +16.5% YoYExceeded RMB10bn for the first time.
• 2025 net profitRMB2.7bn, +9% YoYFull-year profit still achieved growth.
• 1Q26E revenue forecastRMB3.1bn, +28% YoYOrder visibility supports continued sales growth into August and September.
• 1Q26E net profit forecastRMB524mn, -15% YoYMainly affected by expected foreign exchange losses of RMB100-200mn and gross margin pressure.
• 1Q26E gross margin forecast39.2%Down 0.2 percentage points YoY and down 1.4 percentage points QoQ.
• Management 2026E target20%+ growth in sales and net profitGross margin target is to remain at least stable.
• Hydraulic cylinder 2026E sales target20%+ growthManagement segment guidance.
• Hydraulic pump 2026E sales target30%+ growthManagement segment guidance.
• Industrial precision business revenueRMB80mn in 2025, 2026E guidance of RMB200-300mnOnly RMB4mn in 2024; management expects it to turn profitable after revenue exceeds RMB300mn in 2027E.
• Humanoid robot market share assumptions2030E body ball screws 35%, linear actuators 5%, hand ball screws 10%Used in Deutsche Bank's valuation model.
• Target price adjustmentCut from RMB129 to RMB124Due to 6%/2% cuts to 2026/27 net profit forecasts, respectively.
• Current valuation2026E P/E 40.1x, 2027E P/E 33.1xAbove the long-term average one-year forward P/E of 31x.

Impact & implications

For investors, the implication is that Hengli Hydraulic's short-term income statement may continue to be affected by currency and cost disruptions, causing revenue growth and profit growth to diverge; however, excluding these factors, the company's underlying operations still maintain relatively high growth. Robotics, bionic robotics, and aerospace businesses provide the company with a valuation narrative of expanding from the traditional construction machinery cycle into high-growth manufacturing applications. The target price cut reflects short-term earnings forecast downgrades, but the Buy rating is maintained, indicating that the report believes medium- to long-term upside still outweighs short-term profit volatility.

Risks

• High U.S. tariffs on imported products from China and Mexico may weaken Hengli Hydraulic's competitiveness; about 5% of the group's sales come from the U.S., and related products are imported from factories in China and Mexico.
• A lack of recovery in global excavator sales may affect demand for hydraulic components in construction machinery.
• Slower orders from humanoid robot manufacturers and machine tool customers may lead to lower-than-expected growth in linear products.
• Foreign exchange losses caused by RMB appreciation may continue and keep weighing on 1Q26E and subsequent quarterly profits.
• The industrial precision business remains at an early stage, with 2025 revenue of RMB80mn but a loss of RMB150mn; if scale expansion is slower than expected, the profitability inflection point may be delayed.

What to watch

• 1Q26 earnings release, with focus on whether revenue is close to RMB3.1bn and whether net profit is pressured by RMB100-200mn in foreign exchange losses.
• Whether order visibility can support continued sales growth into August and September 2026.
• Execution of management's 2026E targets, especially 20%+ growth in sales and net profit and at least stable gross margin.
• The pace of volume ramp-up for humanoid robot body ball screws from late 2Q26, and the production allocation between the Mexico and China bases.
• Recovery in construction machinery demand, especially growth performance in China, Europe, India, and overseas markets.
• Whether industrial precision business revenue can reach RMB200-300mn in 2026E and turn profitable after revenue exceeds RMB300mn in 2027E.
• The impact of U.S. tariff policy, the RMB exchange rate, and Mexico plant operations on profit margins.