Hengli Hydraulic’s third-quarter revenue beats expectations: why did profit grow more slowly than revenue?
Against a backdrop of weak excavator industry sales, Hengli Hydraulic’s third-quarter revenue rose 30% year on year, exceeding Morgan Stanley’s forecast; gross margin recovered quarter on quarter but remained lower year on year, while net profit growth was also markedly slower than revenue growth.
Original source：Morgan StanleyFirst published on Unhidea：Original source date：
Key takeaway
Hengli Hydraulic’s third-quarter revenue and gross margin slightly exceeded Morgan Stanley’s expectations, but a year-on-year decline in gross margin and fair-value losses weighed on profit growth.
Which revenue forecast did the company beat?
In the third quarter of 2026, Hengli Hydraulic reported revenue of 3.4 billion yuan, up 30% year on year and about 6% above Morgan Stanley’s forecast of 3.195 billion yuan; against a backdrop of weak excavator industry sales, revenue continued the trend seen in the first half, when it grew 32% year on year.
Third-quarter revenue fell 6% from the previous quarter; thus, strong year-on-year growth coincided with a quarter-on-quarter revenue decline.
Why did revenue growth not translate into an equivalent increase in net profit?
Third-quarter gross margin was 40.2%, 0.2 percentage points above Morgan Stanley’s forecast and 0.3 percentage points higher than in the second quarter; it was still 2 percentage points lower than a year earlier.
Net profit attributable to the parent company was 717 million yuan, up 7% year on year and broadly in line with the bank’s forecast. Non-operating losses weighed on profit, including a 120 million yuan fair-value loss arising from renminbi appreciation.
On expenses, third-quarter selling and administrative expenses rose 42% and 35% year on year, respectively, both faster than revenue; net margin was 21.1%, down 4 percentage points from a year earlier.
How does Morgan Stanley value the company, and what are the upcoming milestones?
Morgan Stanley assigns Hengli Hydraulic an Overweight rating and a price target of 115 yuan. The bank applies a 2027 target price-to-earnings multiple of 25 times to the non-humanoid-robot business, below the peak of approximately 40 to 50 times in the previous upcycle. Its reasons include weaker peak domestic sales volumes, a normalization of adjusted net profit growth, and the pump and valve business having passed its period of exceptionally rapid growth.
The humanoid robot business is valued using a discounted cash flow model, assuming a weighted average cost of capital of 11.6% and a perpetual growth rate of 4%. The bank is watching demand for excavators, pumps and valves, entry into foreign brands’ supply chains, and changes in humanoid robot penetration and supply chain share.
The deadline for the preliminary determination in the US countervailing duty investigation was extended from 12 November 2026 to 19 January 2027; the deadline for the anti-dumping investigation remains 26 January 2027.
