Hengli’s net profit in 1H25 grew 11% YoY to RMB1.43bn, which implies an acceleration of 2Q25 earnings growth (+18% YoY to RMB813mn). It is encouraging that the gross margin in 2Q expanded to 44% despite a high base last year. We have left our earnings forecast unchanged as our forecast has been ahead of consensus. We are staying positive on Hengli as (1) the replacement-driven excavator upcycle is solid; (2) humanoid robot components such as ball screws will serve as a structural growth driver. Our TP is unchanged at RMB92 (based on 41x 2025E P/E, equivalent to historical average + 1SD). Reiterate BUY.

Key highlights in 2Q25 results: Revenue in 2Q25 grew 11% YoY to RMB2.75bn. Blended gross margin expanded 0.9ppt YoY and 4.6ppt QoQ to 44%, which is resilient in our view. EBIT grew 17% YoY, as SG&A expenses and R&D ratio were under good control, which offset the increase in administrative expenses arising from the commencement of Mexico production base. Net profit grew 18% YoY to RMB812mn. Operating cash inflow increased 26% YoY to RMB568mn.

Solid growth of hydraulic cylinders in 1H25 driven by upcycle of excavators. For excavator cylinders, sales volume grew 15% YoY to 308k units. We estimate that Hengli had a market share of 64% in China (based on domestic sales of excavators and exports from China) in 1H25.

Strong growth of non-excavator components in 1H25. The segment sales volume in 1H25 surged 30% YoY, driven by compact valves, motors as well as components for AWPs, wheel loaders and agricultural machines.

Risk factors: (1) Slowdown of demand for hydraulic components; (2) slower-than-expected new business development.