恒立液压：Revenue rebounded in 3Q22;Wait for more data points to confirm recovery

Hengli’s reported net profit in 3Q22 grew 20% YoY, driven by FX gain due to the strong dollar. We estimate the core profit (excluding the finance income arising from FX gain) dropped ~9% YoY in 3Q22. While the 4% YoY revenue growth (vs -25% YoY in 1H22) is an early sign of recovery, it’s still slightly below our expectation. We revise down our 2022E/23E earnings forecast by 9%/8% to reflect more conservative assumptions on sales volume. We trim our TP to RMB58 accordingly, based on unchanged 30x 2022E P/E (equivalent to 3-year historical average). Maintain HOLD. We believe we are close to the inflection point but are waiting for more data points to confirm the recovery of excavator sales.

3Q22 earnings highlights. Revenue grew 4% YoY to RMB2bn, which we estimate was driven by the strong sales to the major US customer. Gross margin narrowed 2.1ppt YoY but expanded 1.7ppt QoQ. EBIT slightly dropped 1.6% YoY to RMB576mn. It’s worth noting that Hengli recognized net finance income of RMB170mn (vs RMB6mn in 3Q21), thanks to the appreciation of dollar-denominated assets. This boosted the reported net profit by 20% YoY to RMB692mn. Operating cash inflow dropped 59% YoY to RMB377mn in 3Q22. In 9M22, the reported net profit dropped 11% YoY to RMB1.75bnn.

Production plan in Oct 2022: Hengli has scheduled production volume of 56k units of hydraulic cylinder (excavator), down ~15% YoY. Scheduled production volume of small /medium-large size pump drops >50% YoY, as a result of the continuous inventory clearance that affected the output. Planned volume of motor (mainly for AWP) drops 15% YoY. On the positive side, the planned production for non-standardized cylinders in Oct grows 7% YoY to 16k units.

Early signs of recovery for the excavator industry. For the industry as a whole, we have started to see some early positive signs: (1) strong export will likely exceed expectation on the back of overseas mining activities; (2) upcoming sales data points in China will potentially beat expectations on the back of the very low base and continuous policy easing; (3) major cost items such as steel plate and freight rate are on the down trend, offering upside potential on the margin side.

Upside risk: (1) Strong recovery of excavator demand in China. Downside risks: (1) weak construction activities; (2) risk of overseas demand.