Hengli’s net profit was flat YoY at RMB1.4bn in 1H26. This implies 2Q26 net profit of RMB784mn (slightly down 3% YoY), which is in line with our expectation. The lack of earnings growth in 2Q26, despite strong growth of revenue/EBIT of 32%/22% YoY, was largely due to FX loss (RMB appreciation). We maintain our positive stance on Hengli with unchanged TP of RMB125 (based on 48x 2026E P/E, 1.5SD above the historical average to reflect both the upcycle of hydraulic business and the huge growth potential of precision business). Hengli remains a key pick in our universe. Maintain BUY.

Key highlights in 2Q26 results: Revenue in 2Q26 grew 32% YoY to RMB3.6bn. Blended gross margin contracted 4.1ppts YoY (due to high base) but expanded 1.3ppts QoQ to 39.9%. EBIT grew 22% YoY, as R&D expenses dropped 15% YoY which offset the increase in S&D expenses. Net profit was down 3% YoY at RMB784mn, as the FX loss was recognized (vs gain in 2Q25). Operating cash inflow increased 30% YoY to RMB736mn.

Strong growth of hydraulic cylinders for excavators in 1H26 driven by industry upcycle. Sales volume surged 32% YoY to 408k units. We estimate that Hengli achieved a market share of 67% in 1H26, based on domestic sales and exports from China.

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