Why did net profit rise only 9% despite record revenue?

  • In the third quarter of 2026, Hengli Hydraulic’s revenue rose 30% year over year to 3.4 billion yuan, a quarterly record; recurring net profit rose 30% to 872 million yuan, reflecting strong demand for its core businesses.
  • Net profit attributable to shareholders was 717 million yuan in the same quarter, up 9% year over year. J.P. Morgan noted that a stronger renminbi affected the fair value of foreign exchange swap products, and foreign exchange and fair-value fluctuations weighed on reported profit.
  • Third-quarter operating cash flow rose 55% year over year, providing funding for continued expansion. Revenue and net profit attributable to shareholders in the first three quarters reached 75% and 68% of J.P. Morgan’s full-year forecasts, respectively.

Why did gross margin decline as demand grew?

  • The company’s overall gross margin fell about 2 percentage points year over year to 40.1% in the third quarter. J.P. Morgan believes the main reason was the rapid expansion of early-stage new businesses, including automation ball screws and robotics, and the Mexico plant.
  • Hydraulic cylinder revenue rose 17% year over year, including 22% growth in excavator cylinders; however, cylinder gross margin fell 4.5 percentage points to 36.6%, with particularly pronounced dilution in businesses with a higher share of overseas expansion.
  • Pump and valve revenue rose 42% year over year, while gross margin fell about 12.6 percentage points to 43.6%; hydraulic system revenue rose 12%, while gross margin increased 11.5 percentage points to 41.7%. Diverging profitability across products shows that revenue growth has yet to translate into broad-based margin improvement.

How can new businesses move from expansion to profitability?

  • In the first three quarters of 2026, revenue at the Mexico plant was 176 million yuan, up 480% year over year, but substantial initial investment and pressure from fixed-cost amortization meant the operation remained loss-making. Management expects losses to narrow further as output and capacity utilization increase.
  • Over the same period, automation ball screw revenue reached 250 million yuan, up 400% year over year; management said the business’s gross margin turned positive in the third quarter. J.P. Morgan believes increased scale and improving gross margins could accelerate profit growth in 2027.
  • In robotics, J.P. Morgan says the company is investing in capacity and technology as a core supplier to a US-led humanoid robot project; the bank expects the robotics business to make a more meaningful profit contribution once the project begins mass production.

What conditions underpin J.P. Morgan’s assessment?

  • J.P. Morgan believes growing volumes in new businesses, margin recovery and the global footprint have improved the company’s outlook; the report says the share price has fallen about 20% since July, broadly in line with the CSI 300 Index. The bank maintains its Overweight rating and has a December 2027 price target of 126 yuan.
  • Margin recovery depends on higher utilization of overseas capacity and expansion of high-value businesses. Downside risks listed by the bank include weaker-than-expected excavator sales, slower market-share gains in pumps and valves, gross-margin deterioration, and rising trade tensions and tariffs.