20210824-招银国际-恒立液压-601100.SH-Net_profit_in_2Q21_down_only_2__YoY__slightly_better_than_expectations_6页_1mb

Jiangsu Hengli Hydraulic (601100 CH) Company Update Summary

Core Content

Jiangsu Hengli Hydraulic, a key player in the hydraulic equipment sector, reported net profit in 2Q21 down only 2% YoY to RMB626 million, slightly better than expectations. This resilience is attributed to strong performance in non-standardized hydraulic cylinders and pump, valve, and motor products. The company's 1H21 net profit grew by 43% YoY to RMB1.41 billion, representing 48% of the full year estimate, which is a notable increase compared to the 43% run rate in 1H20.

Main Financial Highlights

Revenue Growth

• 1H21 revenue increased by 51% YoY to RMB5.22 billion.
• 2Q21 revenue grew by 13.6% YoY to RMB2.37 billion.
• Total revenue for FY21E is expected to reach RMB10.06 billion, with a 28.1% YoY growth in 2Q21.

Gross Margin

• 1H21 gross margin remained stable at 41%, down only 0.9ppt YoY.
• 2Q21 gross margin was stable at 41%, despite high steel costs.

Operating Performance

• 1H21 operating cash inflow grew by 25% YoY to RMB1.19 billion.
• 2Q21 operating cash inflow saw a 122.2% YoY increase.

Product Performance

• Hydraulic cylinders for excavators saw a 44% YoY sales volume increase in 1H21, outpacing the industry's 38% growth.
• Non-standardized hydraulic cylinders grew by 23% YoY, with ASP increasing 19% YoY due to improved product mix.
• Hydraulic pump and valve revenue surged by 78% YoY in 1H21, surpassing revenue from excavator hydraulic cylinders.

Key Assumptions and Projections

• Hengli's production volume of hydraulic cylinders is expected to grow by >10% YoY in August 2021.
• 4Q21E is anticipated to see accelerated growth in production due to increased infrastructure spending.
• Revenue projections for FY21E to FY23E show a gradual slowdown, with growth rates of 28.1%, 8.7%, and 5.8% respectively.
• EBITDA is projected to grow from RMB3.476 billion in FY21E to RMB4.128 billion in FY23E.

Valuation and Investment Rating

• Current P/E is 43x 2021E, with a target price (TP) of RMB103.
• P/B is 8.8x, and the stock is currently fairly priced.
• CMBIS maintains a HOLD rating, as the stock is not expected to outperform or underperform significantly.
• Target price is based on a 46x 2021E P/E, with a +7% upside from the current price of RMB95.97.

Risks and Opportunities

Upside Risks

• Strong market share gain in the excavator hydraulic cylinder segment.
• Better-than-expected excavator demand.

Downside Risks

• Continuous slowdown in construction activities.
• Challenges in overseas expansion.

Shareholding and Stock Performance

• Shareholding structure:

  • Wang's family: 71.0%
  • CCASS (Hong Kong): 10.0%
  • Others: 19.0%

• Stock performance:

  • 1-month: -10.4%
  • 3-month: +18.0%
  • 6-month: -9.2%

Balance Sheet Overview

• Equity is expected to grow from RMB5.584 billion in FY19A to RMB14.357 billion in FY23E.
• Cash at the end of the year is projected to increase from RMB2.343 billion in FY19A to RMB8.636 billion in FY23E.
• Non-current liabilities remain stable at RMB629 million in FY23E.

Profitability Metrics

• ROE for FY19A was 25.6%, rising to 35.0% in FY20A and remaining at 35.0% in FY21E, before decreasing to 31.2% and 28.5% in FY22E and FY23E respectively.
• Net profit margin increased from 24.0% in FY19A to 29.2% in FY21E, and is projected to rise to 32.2% in FY23E.

Key Ratios

• Gross margin for FY21E is 39.6%, with EBIT margin at 31.2%.
• Current ratio is expected to increase from 2.5x in FY19A to 4.8x in FY23E.
• Inventory turnover days decreased from 111 days in FY19A to 90 days in FY23E.
• Receivable turnover days remained stable around 100 days.

Conclusion

Jiangsu Hengli Hydraulic has demonstrated resilience in its financial performance, with strong growth in non-standardized hydraulic cylinders and pump, valve, and motor products. Despite challenges such as weak industry demand and high steel costs, the company's net profit growth and operating cash flow have exceeded expectations. However, the HOLD rating is maintained due to the stock being fairly valued. Investors are advised to consider both upside and downside risks before making investment decisions.