Hengli Hydraulic: Strong Demand for Legacy and New Products; Ball Screw Plant Expected to Achieve Break-Even Ahead of Schedule

Overview

This report is UBS’s latest follow-up analysis on Jiangsu Hengli Hydraulic (601100.SS). It highlights that both the company’s traditional hydraulic systems and its emerging ball screw products are currently in short supply, with domestic facilities operating at full capacity. Management reaffirmed its 2026 revenue growth target of 20–30% and expects the ball screw plant to achieve break-even in 2026—earlier than previously indicated. Based on a Sum-of-the-Parts (SOTP) valuation, UBS maintains its 'Buy' rating with a target price of RMB128.

Core views

Strong demand across the board: both legacy and new products face supply shortages. Management noted robust operational performance in Q2 2026, with domestic facilities running at full capacity. The excavator segment benefits from rising overseas infrastructure and mining demand, as well as increased export share by Chinese OEMs, with revenue expected to grow over 30% year-on-year; non-excavator hydraulic products are projected to grow ~20%. Among excavator hydraulic cylinders, medium-sized units show the fastest growth, followed by large-sized, then small-sized. Overseas gross margins are significantly higher than domestic ones, driven by strong customer recognition, stable supply capability, and favorable competitive dynamics. New business breakthrough: earlier-than-expected profitability for the ball screw plant. Since mass production began last year, ball screw output has steadily ramped up, and revenue contribution in 2026 is expected to exceed RMB300 million—substantially higher than last year. Following a price increase early this year (though current pricing remains slightly below global peers), the plant is now expected to achieve break-even in 2026—ahead of previous guidance. Downstream customers are currently dominated by machine tool companies (accounting for half of ball screw demand), with future expansion planned into semiconductor and medical equipment markets. Additionally, the company has begun mass production of planetary roller screws. Capacity remains the key bottleneck: with new equipment arriving next month, implied production value is expected to rise from RMB500 million to RMB1 billion. Global expansion and capital expenditure. To address product shortages, the company has budgeted RMB500–1,000 million in capex over the next two years. Post-expansion, potential annual revenue could reach RMB20 billion (currently RMB14–15 billion). Domestic expansion is progressing smoothly, while overseas factories in Mexico and Brazil are under construction. Although the Mexico facility’s all-in cost is ~30% higher than domestic facilities, its strategic value lies in hedging geopolitical risk and meeting local supply requirements for customers; profitability is expected in 2027. The company’s overall strategy centers on high-end substitution, rapid response, and technological independence—accelerating new product development via overseas talent recruitment, with commercialization cycles as short as six months.

Analysis framework

UBS adopts a combined top-down and bottom-up analytical framework. First, it confirms the stability of the company’s core business by assessing industry fundamentals—including overseas excavator demand and rising export share of Chinese OEMs. Second, it focuses on the ramp-up logic for the new ball screw business, evaluating the timing of its profitability inflection point through capacity constraints, pricing strategy, and downstream market expansion (machine tools, semiconductors, medical devices). Finally, integrating the company’s global capacity strategy—particularly the strategic rationale behind the Mexico plant (beyond pure cost considerations)—UBS applies a Sum-of-the-Parts (SOTP) valuation to each business segment and aggregates them to derive the target price.

Methodology notes

• Valuation MethodSOTP Valuation

  Sum of the Parts (SOTP) Valuation

  For companies with multiple businesses exhibiting distinct growth profiles or operational characteristics (e.g., Hengli Hydraulic’s mature hydraulic components business and high-growth ball screw business), analysts often avoid applying a single P/E multiple. Instead, they value each segment separately and sum the results to more accurately reflect the intrinsic value of each component.

• Industry / Sector Analysis FrameworkSupply-demand framework

  Supply-Demand Framework

  Analyzes alignment between supply-side factors (capacity constraints, full-capacity operation) and demand-side drivers (overseas infrastructure, machine tools, semiconductors) to assess pricing trends and earnings elasticity. The report emphasizes 'capacity as the core bottleneck,' implying volume-and-price upside under supply-constrained conditions.

• Competition & Strategy FrameworkEconomic Moat / Competitive Advantage

  Economic Moat / Competitive Advantage

  Identifies core competitive strengths—such as Hengli Hydraulic’s 'short delivery lead times,' 'efficient service responsiveness,' 'ability to commercialize new products within six months,' and 'technological independence'—which collectively form durable barriers against competitors.

Asset mapping & comparison

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

• Jiangsu Hengli Hydraulic (601100.SS)

  Direct beneficiary: strong demand for both legacy and new products; earlier-than-expected profitability inflection for new business

  Strengths

  Short delivery lead times, efficient service, rapid R&D-to-commercialization cycle (six months), cost advantages, high reliability

  Weaknesses

  Higher costs at Mexico facility (+30% vs. domestic)

  Comparison

  Pricing remains competitive versus global peers (slightly lower), with superior responsiveness advantage

  Risks

  Domestic excavator sales below expectations; overseas breakthrough for pumps/valves hindered; non-standard product demand shortfall; trade friction impeding overseas operations

Key data

• 2026E Revenue Growth Target20–30%Reaffirmed by management; excavator segment >30%, non-excavator hydraulic products ~20%
• 2026E Ball Screw Revenue Contribution>RMB300 millionSignificantly higher than last year, driven by capacity ramp-up and price increase
• Ball Screw Plant Break-Even Timing2026EEarlier than prior guidance
• Capex Budget Over Next Two YearsRMB500–1,000 millionTo resolve capacity bottlenecks
• Potential Annual Revenue Post-ExpansionRMB20 billionCurrently RMB14–15 billion
• Mexico Facility All-in Cost Differential+30%Versus domestic facilities, but provides geopolitical risk hedging
• Target PriceRMB128Based on SOTP valuation; implies ~14.1% upside from current price

Impact & implications

The report concludes that Hengli Hydraulic is at a critical juncture in its transformation—from a leading traditional hydraulic components manufacturer into a platform company for high-precision transmission components. Stable growth from legacy products provides a solid earnings floor, while earlier-than-expected break-even and capacity ramp-up for new products (ball screws) will deliver meaningful incremental earnings. Although the Mexico facility imposes near-term cost pressure, its long-term strategic value lies in enabling access to global mainstream supply chains and mitigating trade friction risks. Overall, the company demonstrates strong alpha in high-end substitution and globalization.

Risks

• Domestic excavator sales below expectations
• Weak demand for the company’s pumps/valves, failing to gain traction in overseas brand supply chains
• Lower-than-expected demand for the company’s non-standard products
• Trade friction hindering the company’s overseas business development

What to watch

• Actual progress toward break-even for the ball screw plant
• Capacity ramp-up following new equipment commissioning (from RMB500 million to RMB1 billion in output value)
• Profitability improvement trajectory of the Mexico facility (target: profitability in 2027)
• Order breakthroughs for pumps/valves with major overseas customers