Why is growth in new businesses starting to improve profitability?

  • Management said the factory automation (FA) and ball screw business turned gross profitable in the third quarter of 2026. Revenue from the business exceeded 250 million yuan in the first nine months, up 400% year on year; third-quarter revenue was 130 million yuan, and full-year revenue is expected to exceed the target of 300 million yuan.
  • About 80% of downstream demand comes from industrial automation, with particularly strong demand for linear guides. The revenue ratio of ball screws to linear guides is approximately 1∶2. The company has raised prices across the product line by 10%–20%.
  • The company maintained its guidance for revenue of 800 million–1 billion yuan from the business in 2027, targeting profitability that year. A positive gross margin means revenue can now cover direct product costs; overall profitability still depends on scale and expenses.

How much of the pressure on group margins has been absorbed?

  • The ramp-up of new businesses and the Mexico plant continue to weigh on margins: group gross margin fell 2.38 percentage points year on year in the first nine months of 2026, but improved sequentially from the first through the third quarter. Management said core business gross margin rose slightly after excluding the effects of ball screws, linear guides and the Mexico business.
  • Recurring profit grew approximately 39% year on year in the third quarter of 2026; operating cash flow for the first nine months was 1.94 billion yuan, up 83% year on year. Management expects gross margin to recover further as new businesses scale up and cost absorption improves.

How far have robotics orders progressed?

  • A major US-led humanoid robot project has entered mass production and accelerated further in October 2026. Management believes Hengli could become a core supplier of ball screws and body linear guides for the project.
  • The company is also expanding its robotics product line: motors have entered initial volume supply, and it is developing customers at home and abroad. Robotics revenue has not yet been disclosed separately, making its contribution to group performance difficult to isolate from the available figures.

How do overseas plants support growth in traditional businesses?

  • Management said the traditional machinery and hydraulics businesses maintained steady growth, with strong order growth from major North American equipment manufacturers, including Caterpillar and Deere. Overseas customers are increasingly accepting local production in Mexico and Indonesia: this allows the company to supply customers nearby and cushion trade risks.
  • The Mexico plant generated revenue of 176 million yuan in the first nine months of 2026, up 480% year on year; third-quarter revenue was approximately 80 million yuan. Management targets revenue above 500 million yuan and profitability in 2027, and expects output to continue rising.
  • Management believes production in multiple locations helps address the US anti-dumping investigation; J.P. Morgan also lists escalating trade tensions and higher-than-expected tariffs as risks.

How does J.P. Morgan assess the company’s outlook?

  • J.P. Morgan believes growth momentum in the core and new businesses will continue into the fourth quarter of 2026 and through 2027, and that the current share-price weakness is at odds with improving fundamentals. The bank maintained its overweight rating and price target of 126 yuan, with a target horizon through December 2027.
  • Besides trade factors, the downside risks the bank is watching include weaker-than-expected excavator sales, slower-than-expected gains in pump and valve market share, and gross margin deterioration.