20210122-招银国际-恒立液压-601100.SH-2020E_earnings_above_market_expectation__Solid_structural_growth_story_5页_944kb

Jiangsu Hengli Hydraulic (601100 CH) Summary

Core Content

Jiangsu Hengli Hydraulic, a key player in the hydraulic components industry, has reported a significant profit alert for 2020E, with net profit expected to surge by 58%–77% YoY to RMB2.05–2.30bn, exceeding market expectations. The mid-point estimate of RMB2.17bn aligns with the firm’s internal forecast of RMB2.18bn but surpasses the consensus of RMB2.06bn, indicating a positive surprise.

Main Points

Earnings Growth Drivers

• Strong downstream demand in the excavator sector, which boosted sales of hydraulic cylinders, pumps, and valves.
• Market share gains in the hydraulic cylinder segment.
• Reduction in SG&A expenses, contributing to improved profitability.

Growth Outlook for 2021E and 2022E

• Excavator demand is forecasted to grow by 10% YoY in 2021E, driven by infrastructure spending and the trend of labor substitution with machinery.
• Sales volume growth for Hengli is expected to be 20% YoY in 2021E for hydraulic cylinders (for excavators) and 40% YoY for pumps and valves.
• Market share for hydraulic cylinders is projected to rise from 50% in 2020E to 59% in 2022E.

Valuation and Target Price

• Target Price (TP) has been raised to RMB143, based on a 65x 2021E P/E ratio, a 50% premium over the historical average of 43x.
• The P/E and P/B ratios are projected to decrease over the years, reflecting improved earnings and growth prospects.

Key Risks

• Slowdown in construction activities.
• Challenges in overseas expansion.
• Potential increase in raw material costs.

Financial Highlights

Revenue Growth

• Revenue is expected to grow from RMB4,211mn in FY18A to RMB10,456mn in FY22E, with a CAGR of 25.6%.
• Hydraulic business revenue is projected to increase from RMB7,225mn in FY20E to RMB10,435mn in FY22E.

Profitability

• Net profit is forecasted to rise from RMB837mn in FY18A to RMB3,387mn in FY22E, with a CAGR of 31.2%.
• Net profit margin is expected to improve from 19.9% in FY18A to 32.5% in FY22E.
• ROE is projected to increase from 19.9% in FY18A to 32.7% in FY22E.

Key Ratios

• Gross margin is expected to improve from 36.6% in FY18A to 42.4% in FY22E.
• EBIT margin is forecasted to rise from 20.9% in FY18A to 33.5% in FY22E.
• Current ratio is expected to increase from 2.2 in FY18A to 4.3 in FY22E, indicating stronger liquidity.

Share Performance

• Shareholding structure is dominated by Wang's family (71.0%), followed by CCASS (Hong Kong) (10.0%) and Others (19.0%).
• Share price performance has been robust over the past 6 months, with an absolute return of 95.0% and a relative return of 66.6%.
• Current price is RMB117.75, with a target price increase of +21% to RMB143.

Key Assumptions and Projections

• Revenue assumptions for hydraulic cylinders (excavator) are revised upward, with a 4.0% increase in 2021E and 5.8% in 2022E.
• Pump and valve revenue is expected to grow by 4.0% in 2022E.
• Overall revenue is forecasted to grow by 4.0% in 2021E and 5.8% in 2022E.

Investment Recommendations

• BUY rating with a target price of RMB143.
• Earnings forecast has been revised upwards for 2021E and 2022E, reflecting improved sales assumptions.
• Strong catalysts are expected in 1Q21E due to robust demand and production growth.

Valuation Metrics

• EV/EBITDA is expected to decline from 136.8 in FY18A to 39.5 in FY22E.
• P/E ratio is projected to decrease from 183.7 in FY18A to 45.4 in FY22E.
• P/B ratio is expected to fall from 33.8 in FY18A to 13.4 in FY22E.

Conclusion

Jiangsu Hengli Hydraulic is positioned for solid growth in the hydraulic components sector, driven by increased demand for excavators, market share expansion, and cost optimization. The firm's revised earnings forecast and target price increase reflect improved earnings visibility and structural growth potential. Despite the positive outlook, key risks such as construction activity slowdown and raw material cost increases remain potential headwinds.