We have several positive takeaways from the post-results call: (1) Loss in Mexico operation reduced in 2Q26 (vs 1Q26), and we now forecast the fullyear loss to be ~RMB100mn (i.e. RMB20mn loss in 2H26E); (2) Precision industry (excluding ball screw) is expected to turn profitable in 2027E; (3) Demand for hydraulic components for excavators is strong, with potentially more order intakes for medium size cylinders for excavators from the major US construction machinery customer in 4Q26E; (4) Ball screws for humanoid robots capacity is on track to reach 100k units in the near term, and is expected to reach 1mn units in 3-5 years, according to the company. We trim our 2026E earnings forecast by 3%, as we incorporated FX loss in 1H26 and slightly lower margin assumptions. We maintain our positive stance on Hengli and roll over our TP to RMB132, based on 42x 2027E P/E (previously 48x 2026E P/E). Our target multiple is based on 1SD above the historical average to reflect both the upcycle of hydraulic business and the growth potential of precision industry business. Hengli remains a key pick in our universe.

Loss in Mexico operation to be further narrowed. Mexico plant is engaged in hydraulic components business at the moment. Based on our understanding, the loss in Mexico plant narrowed to RMB20mn in 2Q26 from RMB60mn in 1Q26. We understand that the annual depreciation expense is ~RMB100mn while the annual operating expense is ~RMB40-50mn. Looking forward, we now assume only RMB20m loss in 2H26E. We forecast the full-year loss to be ~RMB100mn.

Ball screws for humanoid robots. Two production lines in China are in operation at present. Hengli expects higher output in 4Q26E, while the growth in 1Q27E will depend on the production schedule of the major US humanoid robots manufacturer. Hengli’s ball screw capacity is expected to reach 100k units in the near term, and is planned to increase to 1mn units in 3-5 years.

Precision industry segment (excluding ball screw) to potentially turn profitable in 2027E. The downstream applications include semiconductor and machine tools. For machine tools, Hengli will focus more on high-end customers (higher margin). For semiconductor, Hengli will focus on import substitution. In terms of capacity, the annual production value is expected to reach RMB2bn. We expect the segment revenue to double and turn profitable in 2027E.

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