As excavator industry growth slows, Hengli Hydraulics’ excavator hydraulics business remains resilient. Greater scale in new businesses and at its Mexico plant improved the gross margin quarter on quarter, and management raised its full-year revenue expectation for the precision business.
Original source：Morgan Stanley Asia LimitedFirst published on Unhidea：Original source date：
Key takeaway
Morgan Stanley says Hengli Hydraulics’ third-quarter revenue and gross margin slightly exceeded expectations. Greater scale in the precision business and at the Mexico plant is improving profitability, but both businesses are targeting net profit break-even in 2027.
Why are third-quarter growth and gross margin attracting attention?
Morgan Stanley says Hengli Hydraulics’ third-quarter revenue and gross margin slightly exceeded expectations. Despite slowing growth in the excavator industry, the company’s excavator hydraulics business continued to show resilient growth, and its production plan for October was also healthy.
The quarter-on-quarter improvement in gross margin came from greater scale in new businesses and at the Mexico plant. Excluding these two effects, gross margin would still have risen slightly year on year.
How far has the precision business progressed?
Hengli Precision generated approximately 250 million yuan in revenue in the first three quarters of 2026. Management expects full-year revenue to exceed its previous guidance of 250 million to 300 million yuan; fourth-quarter capacity is expected to increase 30% to 40% quarter on quarter.
Management maintained its 2027 revenue target of 800 million to 1 billion yuan, citing high order visibility. The business’s gross margin turned positive in the third quarter, but its net profit break-even target is 2027.
In the humanoid robotics business, weekly production at a major North American customer is gradually increasing. Hengli is also developing customers in China and other overseas markets and has made small-volume shipments to some Chinese customers.
How does the Mexico plant affect the US business and profitability?
Management brought forward the Mexico plant’s break-even target from 2028 to 2027, while setting a revenue target of more than 500 million yuan.
In the first three quarters of 2026, the company’s US business generated approximately 500 million to 600 million yuan in revenue. Management expects full-year revenue to exceed 800 million yuan and to grow more than 30% year on year in 2027.
The Mexico plant currently supplies approximately 60% to 70% of US sales, which could approach 100% by year-end. Management sees limited impact from potential anti-dumping and countervailing duties; its overseas factory network also helps it pursue the share of other Chinese suppliers to US customers.
Which businesses support capacity expansion and valuation?
The company plans to complete construction of its motor plant in the first half of 2027, targeting capacity worth approximately 2 billion yuan and a gross margin similar to that of its pumps and valves business. Future expansion will focus on Indonesia and Mexico.
Morgan Stanley has an overweight rating on Hengli Hydraulics, with a target price of 115 yuan. In its sum-of-the-parts valuation, it applies a target price-to-earnings multiple of 25 times for 2027 to the non-humanoid robotics business, below the approximately 40 to 50 times at the peak of the previous cycle. Reasons include weaker peak domestic sales volumes, normalizing adjusted net profit growth, and the pumps and valves business having passed its period of exceptionally rapid growth.
The humanoid robotics business is valued using discounted cash flow, with a weighted average cost of capital of 11.6% and a perpetual growth rate of 4%. The bank’s main downside risks include a sharp decline in Chinese demand for excavators and pumps and valves, slower-than-expected share gains in non-excavator components, and slower humanoid robot penetration.
