Hengli Hydraulic's 4Q25 profit missed expectations due to margin and FX headwinds, but core business momentum remains strong; Goldman Sachs maintains Neutral

Overview

This report is Goldman Sachs' review of Jiangsu Hengli Hydraulic Co.'s 2025 results and 2026 outlook. The company delivered strong 4Q25 revenue, but gross margin, operating margin, and net margin were all below expectations, mainly due to losses from new businesses such as the Mexico plant, ball screws, and linear guides, as well as FX volatility. Goldman Sachs recognizes the medium- to long-term growth of the company's core hydraulics business and the resilience of overseas demand, but believes the current share price already fairly fully reflects expectations for core business recovery and new business expansion, and therefore maintains a Neutral rating.

Core views

The core views include: first, 4Q25 revenue reached a record high, showing that core demand remains solid, but profitability was pressured by gross margin and FX disruptions; second, visibility for core business growth in 2026 is relatively high, with management expecting major businesses such as cylinders and pumps & valves to maintain 20%-30% yoy growth; third, new businesses have long-term incremental potential, especially linear actuators, ball screws, linear guides, and humanoid robot-related applications, but they are still in the investment and loss-making stage in the short term; fourth, cash flow and dividends remain solid, with the full-year 2025 payout ratio rising to 42.2%; fifth, valuation already fairly fully reflects optimistic assumptions, and the target price increase mainly comes from pushing back the valuation time frame rather than an increase in core valuation parameters.

Analysis framework

The report uses a combination of earnings decomposition, segment growth outlook, regional demand tracking, earnings forecast revisions, and valuation review. Goldman Sachs compares actual 4Q25 revenue, gross margin, expenses, EBIT, net profit, and cash flow with its own forecasts, and combines information from management's conference call to assess the impact of core business, new businesses, FX, and capacity ramp-up on 2026 profits. For valuation, it uses a discounted P/E approach, based on 2030E EPS and a 30x exit P/E, discounted to mid-2027 at an 11% cost of equity.

Methodology notes

• Valuation methodsDiscounted P/E

  Discounted P/E valuation

  Goldman Sachs uses 2030E EPS as the basis, applies a 30x exit P/E, and discounts it to mid-2027 at an 11% cost of equity, resulting in a 12-month target price of Rmb93.0.

• factor_profileGS Factor Profile

  Goldman Sachs factor profile

  This framework compares individual stocks with Goldman Sachs' covered market and industry peers by percentile across growth, financial returns, valuation multiples, and composite score dimensions.

• corporate_eventM&A Rank

  M&A probability rating

  Goldman Sachs classifies the likelihood of company M&A on a scale of 1 to 3, where 3 represents a low probability of about 0%-15%; this report discloses Jiangsu Hengli Hydraulic Co.'s M&A Rank as 3.

Asset mapping & comparison

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

• 601100.SS

  Covered company; leading Chinese A-share hydraulic components company

  Strengths

  Strong demand in the core hydraulics business, with high visibility for domestic and overseas growth; solid cash flow and strong net cash position; linear actuators and robot-related applications provide long-term growth potential.

  Weaknesses

  4Q25 gross margin and net margin were below expectations; new businesses such as the Mexico plant, ball screws, and linear guides are loss-making in the short term; current valuation is high.

  Comparison

  The company is compared within Goldman Sachs' China Advanced Materials & Construction coverage group and Asia ex-Japan coverage universe, with a Neutral rating relative to its peer coverage basket.

  Risks

  Volatility in global mobile machinery demand, slower- or faster-than-expected new product development, changes in humanoid robot shipments and value share, changes in the global trade environment, and exchange-rate volatility.

• Core hydraulics business

  Main profit source and core growth driver for 2026

  Strengths

  Management expects cylinder sales to grow about 20% and pumps & valves to grow about 30% in 2026, with both overseas and domestic demand remaining solid.

  Weaknesses

  ASP for some excavator products declined yoy, and changes in product mix may affect margins.

  Comparison

  Compared with new businesses, the core business has more mature margins, and management expects profitability to recover steadily.

  Risks

  A downturn in the construction machinery cycle, slower overseas demand, and pressure from pricing and product mix.

• Ball screw & linear guide / Linear actuators

  New businesses and long-term growth options

  Strengths

  Targeting applications such as machine tools, general industry, and humanoid robots, with management expecting about Rmb300mn of revenue in 2026 and a profit inflection point in 2027E.

  Weaknesses

  Still generated losses in 2025 and is expected to remain slightly loss-making in 2026; scaling up and expanding high-margin customized products still need validation.

  Comparison

  Long-term growth potential is higher than that of the traditional hydraulics business, but short-term earnings contribution is weaker than the core business.

  Risks

  New product development slower than expected, robot shipments below expectations, and the company's share in planetary roller screws or broader linear actuators below expectations.

• Mexico plant

  Overseas capacity and a drag from new business

  Strengths

  Current monthly output value is about Rmb100mn, with a target of about Rmb1.5bn annual output value and breakeven in 2027.

  Weaknesses

  Labor force of about 600-700 people, fixed labor cost and expenses of about Rmb70-80mn per quarter, and still expected to post a small loss in 2026.

  Comparison

  Compared with mature domestic capacity, the Mexico plant is still in the ramp-up stage and is dragging on overall gross margin.

  Risks

  Capacity ramp-up slower than planned, labor cost pressure, volatility in overseas orders, and changes in the trade environment.

Key data

• 12-month target priceRmb93.0Raised from Rmb83.0; versus current price of Rmb100.40, implying about 7.4% downside.
• 4Q25 revenueRmb3.15bn, +28% yoy13% above Goldman Sachs' forecast and a record high.
• 2025 revenueRmb10.94bn, +17% yoy3% above Goldman Sachs' forecast.
• 4Q25 net profitRmb646mn, -10% yoy20% below Goldman Sachs' forecast, dragged by gross margin and FX factors.
• 4Q25 gross margin40.6%Down 6.1ppt yoy and 8.5ppt below Goldman Sachs' forecast.
• 2025 net margin25.0%Down 1.7ppt yoy and 2.4ppt below Goldman Sachs' forecast.
• Full-year 2025 payout ratio42.2%Higher than 37.4% in 2024; final cash dividend of Rmb751mn and interim dividend of Rmb402mn.
• Net cash positionRmb8.84bnAs of end-4Q25, slightly up from Rmb8.78bn at end-3Q25.
• 2026 revenue target for ball screws and linear guidesabout Rmb300mnManagement expects a slight loss to continue in 2026, with a profit inflection point in 2027E.
• Mexico plant monthly output valueabout Rmb100mnStill expected to post a small loss in 2026, targeting breakeven in 2027 at annual output value of about Rmb1.5bn.
• 2026E EPSRmb2.46Goldman Sachs forecast, implying about 20.4% yoy growth.
• 2026E P/E40.9xBased on the Goldman Sachs forecast table in the report.

Impact & implications

The report's investment implication is balanced: fundamentally, Hengli Hydraulic benefits from a recovery in domestic construction machinery, continued overseas demand, import substitution, and expansion in linear actuators, so the long-term growth story remains intact; but short-term earnings quality is affected by losses from ramping new businesses, higher depreciation, and FX volatility. As the stock price already reflects relatively optimistic expectations for core business recovery and long-term contributions from new businesses, Goldman Sachs believes the risk-reward is not sufficiently compelling and it is appropriate to continue watching order sustainability, loss reduction in new businesses, and the pace of margin recovery.

Risks

• Global mobile machinery demand may be stronger or weaker than expected.
• Development of new products such as linear actuators and electric cylinders may be faster or slower than expected.
• Global humanoid robot shipment outlook and the company's wallet share in planetary roller screws or broader linear actuators may be higher or lower than expected.
• The global trade environment may become more favorable or less favorable.
• FX volatility may disrupt short-term earnings, especially as the company holds about US$700mn in USD balances.
• Losses from new businesses, higher depreciation, and the Mexico plant's fixed costs may continue to pressure margins.

What to watch

• Whether strong overseas orders continue in 1Q26 and subsequent quarters, especially demand related to Europe, India, the Americas, and Africa.
• Whether domestic construction machinery demand can achieve the 20%-30% yoy growth expected by management.
• Whether gross margin in the core business recovers as management expects, and whether the drag from new businesses weakens quarter by quarter.
• Progress toward the approximately Rmb300mn 2026 revenue target for the ball screw and linear guide business, and the probability of delivering the 2027E profit inflection point.
• Execution of the Mexico plant's monthly output value, fixed labor costs, and 2027 breakeven target.
• The impact of FX gains/losses on 1Q26 and full-year profits.
• Whether revisions to 2026E-2028E EPS forecasts and changes in the valuation time frame continue to affect the target price.