JIANGSU HENGLI(601100)：4Q23 & 1Q24 EARNINGS NOT EXCITING; BUT MORE POSITIVE DRIVERS TO COME-格隆汇

机构：招银国际
研究员：Wayne FUNG

　　Hengli’s net profit in 2023 was +7% YoY to RMB2.5bn, which is -5%/+3% versus our/consensus estimates. Net profit in 1Q24 dropped 4% YoY to RMB602mn, due to weak demand for excavators’ hydraulic components and an increased expense ratio. We trim our earnings forecast in 2024E/25E by 13%/15%, mainly due to lower volume assumptions for excavator-related products. Our TP is revised down to RMB64, based on 31x 2024E P/E (historical average). We still like Hengli as (1) revenue contribution from non-excavator components continues to increase; (2) product expansion to ball screws (a key component of robots), which started trial production in 1Q24, will likely serve as a new growth driver; (3) the commencement of hydraulic components production base in Mexico starting from 2Q24 will help speed up its penetration in the US market.
Key highlights in 2023 results: Revenue in 2023 grew 10% YoY to
　　RMB9bn (2%/19%15%/17% growth of hydraulic cylinders / pump & valve / hydraulic systems / components). In particular, sales volume of all non- excavator products reported growth. Blended gross margin expanded 1.3ppt YoY to 41.9%, driven by hydraulic cylinders. EBIT, however, grew only 8% due to a higher SG&A expense ratio. Net profit in 2023 grew 7% to RMB2.5bn while operating cash inflow rose 30% YoY to RMB2.68bn. In 4Q23, net profit increased by 26% YoY to RMB745mn, driven by 16% revenue growth and gross margin expansion (to 46%).
　　Key highlights in 1Q24 results: Net profit dropped 4% YoY to RMB602mn, due to a 3% YoY decrease in revenue, 0.8ppt YoY gross margin contraction (to 40.1%) and an increase in expense ratio in general, which offset the increase in finance income (helped by weak RMB). Net profit in 1Q24 accounted for 22% of our full-year estimates (run rate in 1Q23: 25%).
　　Maintain BUY. Our new TP of RMB64 (previously: RMB83) is based on 31x 2024E P/E (rolled over from 2023), equivalent to the historical average. We no longer assign a valuation premium (previously 1SD above the historical average) as we expect relatively stable earnings growth between 2024E and 2026E.
　　Risk factors: (1) further weakness in the demand for hydraulic components for excavators; (2) slower-than-expected new business development