恒立液压：Expect a strong 3Q;Robust demand in Oct;Raised estimate &TP

Reiterate BUY. We expect Hengli’s share price momentum to continue driven by several near-term catalysts:

(1) We forecast Hengli to report an impressive net profit growth of 95% YoY in 3Q20E;

(2) Hengli’s production plan in Oct suggests robust demand to continue across major products;

(3) improvement in construction activities will continue to offer strong support to the demand for excavators and other machinery going forward. We revised up our earnings forecast in 2020E-22E by 3-6% (9-10% above consensus). Our TP is lifted to RMB87from RMB82, based on unchanged multiple of 45x 2021E P/E (historical average).3Q20E results preview. We estimate that Hengli’s hydraulic cylinder volume reached 170k units (for excavators) and 34k units (for non-standardized products) in 3Q20E. Fast growing products such as valves and motors saw sequential monthly sales increase in 3Q. We forecast Hengli to deliver revenue growth of 50% YoY with gross margin expansion YoY, thanks to higher utilization rate. We estimate net profit to grow 95% YoY to RMB481mn in 3Q. Hengli is scheduled to report the results on 27Oct.Production volume to stay high in Oct. Based on our understanding, excavator cylinder monthly production volume reached 63k units in Sep, suggesting sequential growth. According to the production plan in Oct, excavator cylinder volume is expected to stay at similar level. Besides, the production plan for pump and valves implies sequential growth in Oct. We expect robust demand throughout 4Q, on the back of strong construction activities.Key risks:

(1) Slowdown of construction activities;

(2) risk of overseas expansion;

(3) increase in raw materials cost.