Higher expenses are transitory; eyes on new products

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE MORE REPORTS FROM BLOOMBERG: RESP CMBR <GO> OR http://www.cmbi.com.hk 1 M N 29 Apr 2025 CMB International Global Markets | Equity Research | Company Update Jiangsu Hengli (601100 CH) Higher expenses are transitory; eyes on new products Hengli’s reported net profit in 4Q24 /1Q25 was -4% YoY /+3% YoY and came in slightly lower than our expectation due to higher administrative expenses. That said, the higher expenses were due to the booking of depreciation of Mexico production plant and precision business (ball screws and linear motion) as a result of the transfer of construction-in-progress to fixed assets. We fine-tune our 2025E/26E earnings forecast by -2%. We are staying positive on Hengli and revise up our TP to RMB92 (previously: RMB64), based on 35x 2025E P/E (equivalent to historical average + 1SD) as: (1) we roll over our valuation to 2025E, and (2) we believe humanoid robots components such as ball screws will serve as the important growth driver in the medium term. Maintain BUY.  Key highlights in 2024 results: Revenue in 2024 grew 5% YoY to RMB10bn (1%/10%/2%/2% growth of hydraulic cylinders / pump & valve / hydraulic systems / components). Blended gross margin expanded 1.4ppt YoY to 42.6%, driven by hydraulic cylinders. EBIT, however, was flat YoY largely due to a 1.8ppt YoY increase in administrative expense ratio (to 6.3%). Net profit was RMB2.5bn, stable YoY. In 4Q24, net profit dropped 4% YoY to RMB717mn, due to a 7% YoY decline in revenue and higher administrative expense ratio (+3.4ppt to 8.7%).  Key highlights in 1Q25 results: EBIT dropped 9% YoY to RMB579mn, as the 3% YoY increase in revenue was offset by 0.7ppt YoY contraction of gross margin (to 39.4%) and an increase in expense ratio in general. Helped by a 2.6x YoY increase in net finance income, net profit in 1Q25 grew 3% YoY to RMB618mn, which accounted for 21% of our full-year estimates (run rate in 1Q24: 22%).  Potential reduction of segment loss in 2025E. We understand that the loss attributable to Mexico production plant and precision business was ~RMB100mn, due to the depreciation of newly-added fixed assets. Hengli sees chances of loss reduction in 2025E when product delivery increases.  Outlook on ball screws. The current annual capacity of ball screws is enough to support production value of RMB700-800mn. Hengli targets to increase the capacity to RMB2bn, equivalent to ~100k units of ball screws.  Risk factors: (1) further weakness in the demand for hydraulic components; (2) slower-than-expected new business development Target Price RMB92.00 (Previous TP RMB64.00) Up/Downside 29.3% Current Price RMB71.17 China Capital Goods Wayne FUNG, CFA (852) 3900 0826 waynefung@cmbi.com.hk Stock Data Mkt Cap (RMB mn) 95,426.2 Avg 3 mths t/o (RMB mn) 1,266.2 52w High/Low (RMB) 95.00/42.14 Total Issued Shares (mn) 1340.8 Source: FactSet Shareholding Structure WA