JPMorgan's research report dated May 28, 2026, titled "Accelerating new drivers and global expansion," presents a notably more optimistic outlook from the management of Jiangsu Hengli Hydraulic Co.,Ltd. (SHSE: 601100) compared to the first-quarter earnings briefing. The core message is not that the traditional hydraulic business is faltering; on the contrary, excavator pump and valve sales are growing rapidly, with orders from Caterpillar piling up. The truly compelling development is the company's swift transformation from a hydraulic cylinder manufacturer into a supplier of core components for robotics. Furthermore, new segments like FA ball screws and aerospace have already secured orders far exceeding current production capacity. The report maintains an Overweight rating with a target price of RMB 121 (based on a DCF model to June 2027), compared to a current price of RMB 112.09. The upside may not be dramatic, but the narrative is solid, suggesting a company driven by real incremental contributions from new business lines rather than valuation expansion.
Key Report Insights
The management's tone at the summit was significantly more positive than in Q1 briefings. The confidence stems from several factors: the FA ball screw and robotics businesses are ramping up quickly with clear order visibility, and capacity expansion and global layout are disciplined and paced. The traditional hydraulic segment remains stable, with management expressing confidence in improving gross margins and securing high-value global orders. In essence, demand for the new business lines far outstrips current capacity, setting the stage for multi-year growth once new production lines come online.
FA Ball Screws: High Demand and Capacity Constraints
This segment is arguably the most exciting part of the report. Downstream demand is exceptionally strong, with industries like machine tools, 3D printing, semiconductor equipment, and AI-related manufacturing competing for supply. Orders already exceed current capacity, with output expected to double in Q2 and further expansion planned for the second half. Management's revenue targets are RMB 300-400 million for FY26, RMB 1 billion for FY27, and a potential doubling again in FY28-29. Gross margins are expected to approach 20% at the RMB 1 billion revenue scale, with benefits from material cost advantages, efficiency gains, and product longevity continuing to boost profitability. This phase is beyond mere concept; growth is now limited by production capacity.
Robotics Business: Scaling Production and Securing a Major Client
In robotics, current monthly shipments are in the hundreds of sets, with plans to increase to thousands in the second half. Annual capacity is planned for 100,000 to 200,000 sets. A site in Mexico has been secured to potentially support a million-unit scale in the future. Crucially, Hengli is the largest supplier of core components for a leading US robotics customer, holding over 70% share under a PPAP framework agreement. The customer's V3 version is in mass production, with plans to add motors and a third product line later this year. Robotics revenue is estimated at about RMB 100 million for FY26, with profitability expected upon reaching scale. Feedback from the US customer is very positive, underscoring Hengli's critical position in the supply chain. This is a pragmatic play in industrial robotics and core components, backed by real orders, clients, and capacity, not speculative hype around humanoid robots.
Mexico Plant: Strategic Investment for Future Profitability
The Mexico plant is expected to generate RMB 30-50 million in revenue for FY26 but incur an expanded loss of RMB 100-200 million, primarily due to high depreciation and low initial efficiency. Management aims to double revenue in FY27 and achieve breakeven as fixed costs are diluted. Equipment installation and commissioning are underway, with the ramp-up supporting future robotics and traditional hydraulic products. Expansion into India and Brazil is also under consideration, reflecting ambitious plans for a global supply chain.
Aerospace: A High-Growth Niche Market
Management has identified aerospace as a future high-growth area. Hengli is already supplying domestic customers with rocket launch platforms and attitude control devices, with unit values ranging from hundreds of thousands to RMB 20 million. Competition in this segment is minimal. The company plans to further expand aerospace applications by migrating its core motion control technology and engineering capabilities. This strategy mirrors the successful move from excavator hydraulics into pumps and valves—leveraging transferable technology into a favorable competitive niche.
Traditional Hydraulics: Strong Growth in Core Segments
Excavator business is forecast to grow 30%-40% in FY26, with pumps and valves growing 40%-50%. Hengli is the largest global cylinder supplier to Caterpillar, with new products accounting for 60%-70% of Caterpillar's global procurement. The revenue target related to Caterpillar this year is RMB 1 billion. New products carry higher profit margins with significant room for further improvement. Gross margins for Caterpillar-related excavator products are 43%-45%, above the group average. Management continues to prioritize high-value, high-growth opportunities across hydraulics, robotics, and internationalization.
Valuation and Risk Factors
JPMorgan's DCF-derived target price of RMB 121 for June 2027 uses a WACC of 8.4% and a terminal growth rate of 5%. Key parameters include a risk-free rate of 3.0%, an equity risk premium of 6.8%, a beta of 1.0x, and a post-tax cost of debt of 4.3%. These are not aggressive assumptions, fitting a standard manufacturing valuation framework. While the current upside is around 8%, there is potential for upward revision if robotics or FA ball screw volumes exceed expectations. The report lists four main downside risks: weaker-than-expected excavator sales, slower market share gains for pumps/valves, gross margin deterioration, and an escalation in trade frictions and tariffs. The Mexico plant's existence provides a degree of hedging against potential trade tensions.
Final Assessment
The overarching takeaway is that Hengli Hydraulic's "second growth curve" is transitioning from concept to concrete orders. The company exemplifies a traditional manufacturing leader in transformation: its core business continues to generate cash flow and profits, while new lines have clear order books and capacity roadmaps. The progression from RMB 300-400 million to RMB 1 billion and potentially RMB 2 billion in FA ball screws, and robotics scaling from a RMB 100 million base to million-unit capacity, is backed by customer orders and ongoing factory construction. While JPMorgan maintains an Overweight rating with a RMB 121 target, the true investment case may lie in the market potentially re-rating the company as new businesses scale. The valuation framework for a "hydraulic leader" could differ significantly from that for a "leader in robotics core components and aerospace precision manufacturing."
Comments