Earnings slightly below expectations, but the long-term growth thesis remains intact

Overview

This report is Nomura's earnings review following Hengli Hydraulics' 2025 annual report. The report believes that the company delivered solid revenue growth, but net profit came in slightly below expectations due to lower gross margin, FX losses, and non-recurring losses. Despite short-term pressure on profitability, Nomura remains positive on the long-term growth driven by a recovery in the excavator market, expansion in non-excavator hydraulics, and commercialization-driven volume ramp-up of linear transmission products.

Core views

The core view is that short-term earnings volatility does not change the long-term growth path. In 2025, the company's revenue rose 16.5% YoY, sales of excavator hydraulic products increased by more than 20% YoY, and pumps and valves for mid-to-large excavators nearly grew 40%. The non-excavator business made progress in offshore engineering, water conservancy, and other areas, while the linear transmission business has established capacity for high-precision guide rails and precision ground ball screws and has won more than 300 customers. Nomura therefore raised its 2026F and 2027F revenue and profit forecasts and maintained its Buy rating.

Analysis framework

The report mainly uses earnings decomposition, business-segment growth assessment, and a relative valuation framework. It first analyzes the impact of 2025 revenue, gross margin, expenses, FX, and non-operating items on profit, then evaluates the demand and volume ramp-up outlook for excavator hydraulics, non-excavator hydraulics, and linear transmission products, and finally derives the target price based on 2026F EPS and the target P/E multiple.

Methodology notes

• Valuation methodsTarget P/E valuation

  Using 2026F EPS of CNY2.68 multiplied by a target P/E of 49x yields a target price of CNY131.12.

  The 49x target P/E is below the peer average 2026E P/E, but close to the company's five-year historical average plus 1.5 standard deviations; Nomura believes the accelerated ramp-up of new businesses supports this valuation level.

• benchmarkRelative rating benchmark

  The A-share rating benchmark is the CSI300 Index.

  Buy means the analyst expects the stock to outperform the benchmark index over the next 12 months.

Asset mapping & comparison

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

• 601100.SS

  Research target; A-share hydraulic components company for construction machinery

  Strengths

  Demand for excavator hydraulic products is recovering, and pumps and valves for mid-to-large excavators are breaking the foreign monopoly; the non-excavator hydraulics market is about three times the size of the excavator hydraulics market; linear transmission products have the potential to become a new growth driver.

  Weaknesses

  Gross margin declined in 2025, while the Mexico base and Hengli Precision are still ramping up; FX losses pushed up financial expenses, causing net profit to come in slightly below expectations.

  Comparison

  The target P/E is 49x, below the peer average 2026E P/E, but close to the company's five-year historical average plus 1.5 standard deviations; the stock has outperformed the CSI300 over the past year with higher volatility.

  Risks

  Weaker-than-expected downstream demand, geopolitical tensions, slower-than-expected expansion of new businesses, raw material price volatility, delays in investment projects, and foreign exchange risk.

Key data

• 2025 revenueCNY10,941mnUp 16.5% YoY, slightly above Nomura's expectations.
• 2025 net profitCNY2,734mnUp 9.0% YoY, slightly below Nomura's expectations.
• 2025 gross margin41.58%Down 1.25ppt YoY, affected by the ramp-up of the Mexico base and Hengli Precision.
• 2026F revenue forecastCNY13,140mnRaised 6.6% versus the previous forecast.
• 2027F revenue forecastCNY15,420mnRaised 7.6% versus the previous forecast.
• 2026F net profit forecastCNY3,588mnRaised 2.9% versus the previous forecast.
• 2027F net profit forecastCNY4,485mnRaised 8.5% versus the previous forecast.
• 2028F revenue and net profit forecastCNY17,911mn / CNY5,263mnNewly introduced in this report.
• Target priceCNY131.12Raised from the previous CNY126.54, implying 35.4% upside.
• Current priceCNY96.85As of the close on April 24, 2026.
• Market capitalizationUSD18,916.0mnAs disclosed in the report.
• 3-month average daily turnoverUSD165.5mnAs disclosed in the report.

Impact & implications

The report's investment implication for Hengli Hydraulics is positive overall: while the market may focus in the short term on margins, FX losses, and project ramp-up pressure, Nomura places greater emphasis on the medium- to long-term value of the domestic construction machinery recovery, breakthroughs in overseas and non-excavator segments, and the linear transmission business moving from sample delivery to mass production. If the ramp-up of new businesses materializes, the company's revenue and profit growth could remain at a relatively high level from 2026F to 2028F.

Risks

• Domestic and international downstream demand may be weaker than expected.
• Geopolitical tensions may affect overseas expansion or supply chains.
• Expansion of new businesses may be slower than expected.
• Raw material price volatility may compress margins.
• Delays in investment projects may affect capacity release.
• FX volatility may cause financial expense and earnings fluctuations.

What to watch

• The sustainability of the recovery in demand for excavator hydraulic components and progress in domestic substitution of mid-to-large pumps and valves.
• Order momentum and volume ramp-up speed of the non-excavator hydraulics business in offshore engineering, water conservancy, and other areas.
• Customer expansion for linear transmission products and the mass-production progress of ball screws and planetary roller screws.
• Gross margin recovery after the ramp-up of the Mexico base and Hengli Precision.
• Exchange rate changes and their impact on financial expenses.
• Delivery against 2026F to 2028F revenue, net profit, and EPS forecasts.