Hengli Hydraulic posted strong 1Q26 revenue but earnings missed expectations; Goldman Sachs maintains Neutral rating

Overview

This report is Goldman Sachs' review of Jiangsu Hengli Hydraulic Co., Ltd. (601100.SS) 1Q26 results. The company delivered strong revenue growth in the quarter, with contributions from excavator cylinders, non-standard cylinders, pumps and valves, and new businesses, but profitability was affected by weaker-than-expected gross margin, FX losses, and losses from the linear actuator business and the Mexico factory, causing net profit to fall short of Goldman Sachs expectations. Goldman Sachs maintains its Neutral rating and unchanged target price of Rmb93.0.

Core views

The core view is that the company's traditional core hydraulic business still has strong operating momentum, and the tight 2Q26 production schedule indicates continued demand; linear actuators and humanoid robot-related businesses offer long-term growth potential, but remain in the investment and loss-making stage in the short term; depreciation and SG&A expenses at the Mexico factory weigh on profitability, though losses are expected to narrow as utilization improves; the current share price already largely reflects optimistic expectations for new businesses and cyclical recovery, so valuation appears reasonable relative to the growth outlook.

Analysis framework

The report evaluates the company's short-term earnings pressure and medium- to long-term growth potential through quarterly earnings decomposition, regional and product-line revenue analysis, gross margin and expense attribution, cash flow and balance sheet observations, management guidance, capex plans, and the target-price valuation model.

Methodology notes

• Valuation methodsDiscounted P/E method

  The 12-month target price is based on 2030E EPS, a 30x exit P/E, and an 11% cost of equity discounted back to mid-2027.

  Goldman Sachs believes the 30x target P/E reflects the long-term growth potential from import substitution in the hydraulic market and expansion in linear actuators. This multiple is in line with the company's long-term average, but above the roughly 25x average trading level over the past three years.

• Factor frameworkGS Factor Profile

  The stock is compared on a relative basis across four dimensions: growth, financial returns, valuation multiples, and composite indicators.

  This framework uses Goldman Sachs forecasts and standardized rankings to compare the company with the broader coverage universe and industry peers, providing investment context rather than independently determining the rating.

• M&A frameworkM&A Rank

  The company's M&A Rank is 3, indicating a low probability of being acquired.

  Goldman Sachs states that M&A Rank 3 corresponds to a 0%-15% probability of being acquired and is generally not incorporated into the target price.

Asset mapping & comparison

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

• 601100.SS

  Covered stock, A-share listed company

  Strengths

  One of China's largest hydraulic component manufacturers, with solid demand in its core hydraulic business; non-excavator applications, linear actuators, and humanoid robot applications provide long-term growth options; cash flow and net cash position are healthy.

  Weaknesses

  1Q26 gross margin was below expectations, new businesses and the Mexico factory are still loss-making, and FX losses materially dragged on profit.

  Comparison

  Goldman Sachs believes the company's long-term growth outlook is better than that of traditional cyclical hydraulic stocks, but the market has already priced in relatively optimistic assumptions for new businesses and the recovery of the core business, leaving valuation relatively fair versus the growth outlook.

  Risks

  Volatility in global construction machinery demand, the pace of new product development, changes in humanoid robot shipments and market share, the global trade environment, FX volatility, and slower-than-expected ramp-up at the Mexico factory.

Key data

• 1Q26 revenueRmb3.21bn, up 33% YoYBroadly in line with Goldman Sachs expectations.
• 1Q26 net profitRmb652mn, up 6% YoY16% below Goldman Sachs expectations.
• 1Q26 gross margin38.6%Down 0.8ppt YoY and 4.4ppt below Goldman Sachs expectations.
• 1Q26 EBITRmb774mn, up 34% YoY14% below Goldman Sachs expectations.
• 1Q26 net margin20.3%Down 5.2ppt YoY and 4.0ppt below Goldman Sachs expectations.
• FX lossesabout Rmb205mnManagement disclosed that strong investment income was offset by elevated FX losses.
• Quarterly sales of linear actuatorsRmb48mnMarked sequential growth; management provided a 2026 revenue target of Rmb250-400mn.
• Quarterly loss of linear actuatorsabout -Rmb20mnThe new business remains in the investment phase.
• Mexico factory quarterly sales and losssales of about Rmb40mn, net loss of about -Rmb60mnLosses mainly stem from depreciation and SG&A expenses and are expected to narrow as utilization improves.
• 1Q26 operating cash flowRmb518mnSignificantly higher than Rmb50mn in 1Q25.
• 1Q26 free cash flowRmb365mnCompared with -Rmb32mn in 1Q25 and Rmb522mn in 4Q25.
• Net cashRmb8.96bnUp from Rmb8.84bn at the end of 4Q25.
• Target priceRmb93.0The 12-month target price remains unchanged.
• Current priceRmb104.52Price disclosed in the report, implying about 11.0% downside to the target price.

Impact & implications

The report has a broadly neutral implication for 601100.SS: revenue and order momentum validate the resilience of the company's core business, but earnings quality is being dragged in the short term by new businesses, the Mexico factory, and FX factors. If linear actuators, humanoid robot applications, and Mexico factory utilization improve faster than expected, the long-term growth story could continue to strengthen; if gross margin recovery falls short of expectations or robot volume ramps more slowly than expected, the current valuation could come under pressure.

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, or market share in planetary roller screws or broader linear actuators, may be higher or lower than expected.
• Changes in the global trade environment may affect overseas expansion and profitability.
• FX volatility may continue to affect profit performance.
• Slower-than-expected utilization improvement at the Mexico factory could prolong the loss-making period.

What to watch

• Whether the tight 2Q26 production schedule can translate into revenue and profit growth.
• Whether gross margin can recover from the low level in 1Q26, especially the drag from non-excavator cylinders, new businesses, and the Mexico factory.
• Progress toward achieving the 2026 linear actuator revenue target of Rmb250-400mn.
• The timeline for small-batch deliveries of humanoid robot products in 3Q26 and larger-scale mass production in 4Q26 and 1Q27.
• Revenue ramp-up at the Mexico factory, absorption of depreciation, and the target of turning net profit positive in 2027.
• The effect of raising FX hedging capacity to US$1.5bn on improving profit and loss.
• Whether follow-up capex is mainly allocated to new businesses such as robotics, and whether it leads to higher utilization.