Core views:

Hengli changed the cost system for excavator manufacturing in China. According to the Sany Financial Report, Ford's Prospectus, and Construction Machinery Association estimates, the value of hydraulic parts accounts for about 26% of excavator production costs. In 11-23 years, Hengli Hydraulics multiplied the two-wheel industry cycle to increase the domestic share of hydraulic parts such as excavator cylinders, pumps, and valves to 78%, breaking foreign monopolies and helping domestic excavators break through the world.

The expansion of the territory was carried out by snobs, and every day promoted peace. According to Wind, Hengli's stock price doubled more than 30 times in 16-21, and the performance was realized (revenue in 20 was about 6 times that of 16 years) + valuation increase (PE (FY1) more than 70x at the end of 2020) to achieve Davis's double hit: (1) Expansion: from cylinders to pumps, valves, and motors, from excavators to non-excavators; (2) Globalization: binding to major overseas customers+following local companies. The market saw the possibility of Hengli moving globally from competition for current excavator cylinders; (3) scale effect: demand for hydraulic parts should rise Price, capacity utilization, climbing cost reduction, company net Interest rates were raised from 5% in '16 to 29% in '20.

How is Hengli different in this cycle? According to Wind, (1) revenue side: non-excavation revenue continues to grow, while excavator-related revenue is basically flat (excavator export+pump valve discharge); (2) profit side:

Net interest rate declined by 1 pct in 20-23 (down 23 pct in 11-15), and profitability is resilient.

Lift high and continue to expand the circle and develop into a precision transmission platform company. There are bottlenecks and limits in the single market for parts. Relying on underlying precision processing technology, the company expanded castings upstream, expanded pumps and valves horizontally, opened up downstream vertically, and moved linearly into a wider market in '23. According to research estimates, China's linear drive market space exceeded 80 billion yuan in '22. According to the company's interim report, as of the end of June '24, the company's ball screws had been delivered in samples and in small batches.

Profit forecast and investment suggestions: The hydraulic parts of the company's excavators are in the upward phase of the cycle. The growth of non-excavation hydraulic parts is relatively stable, and linear drive is expected to open up future ceilings. The company is expected to achieve net profit of 2.7, 3.2, and 4 billion yuan in 24-26, +7%, +21%, and +24% over the same period, giving the company 30 x PE for 24 years, corresponding to a reasonable value of 59.75 yuan/share, maintaining a “buy” rating.

Risk warning: policy risk, market risk, exchange rate risk, raw material price fluctuation risk.