中国-机械行业-中国高端液压元件：进口替代和优质产品推动爱迪精密

Disclosures & Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. Issuer of report: HSBC Qianhai Securities Limited View HSBC Qianhai Securities at: https://www.research.hsbc.com Voting opens 1st June – 7th AugustIf you value our service and insight, please voteClick here to voteAsiamoney Brokers Poll 2020Equity Research Report  We remain positive on excavator demand in China, which bodes well for domestic hydraulic component makers  High-end manufacturers should benefit from a rise in import substitution  Initiate coverage of Eddie Precision at Buy with RMB63.20 TP; remain Buy on Hengli Hydraulic with higher TP of RMB94.10 Two hot themes. Import substitution is a hot topic for investors as China moves to reduce its dependence on imports for key components in a number of industries. The excavator industry is in the limelight, given consistent ahead-of-consensus growth during the past few years. Two national leaders in high-end hydraulic component manufacturing, Hengli Hydraulic and Eddie Precision, are benefiting from strong excavator demand and accelerating import substitution. Meanwhile, we view demand for hydraulic components in non-excavator segments as a long-term growth driver. Eddie Precision (603638 CH). Eddie is China’s largest manufacturer of hydraulic breakers, the high-end percussion hammers fitted to excavators; the company supplies to both domestic and overseas excavator makers. Eddie is also ramping up its production of hydraulic valves, pumps and motors, mainly supplying to Sany Heavy (600031 CH, CMP RMB18.53, Buy, TP RMB26.90) at this stage. We forecast a 42% EPS CAGR over 2020-22e. Share price continued to re-rate on the back of solid corporate fundamentals, improving trading liquidity, and rising recognitions among investors. Potential catalysts: stronger-than-expected excavator demand, a faster ramp-up of its hydraulic components business, rising import substitution, higher adoption of hydraulic breakers in China, and a rise in overseas shareholdings. Hengli Hydraulic (601100 CH). Hengli is China’s market leader in high-end hydraulic component manufacturing. Its impressive client list is a reflection of Hengli’s product quality and industry reputation. We forecast a 38% EPS CAGR over 2020-22e. Potential catalysts include higher-than-expected excavator sales in China, accelerating import substitution, expansion in India, the ramp-up of its non-excavator business, and further consensus earnings upgrades. Valuation. We initiate on Eddie with a Buy rating and a TP of RMB63.20. We use a 62.0x 12-month forward PE multiple, 2SD above the stock’s historical peak. We raise our TP for Hengli from RMB89.10 to RMB94.10; we now use a 40.3x 12-month forward PE multiple, 1SD above the historical average. We think Eddie and Hengli deserve a valuation premium given their robust earnings growth, rising ROE and improving tr