Hengli Hydraulic Earnings: Fair Value Estimate Reduced by 3% to CNY 58 on Higher Employee Expenses

Narrow-moat Hengli Hydraulic's third-quarter revenue growth met our expectations, but the margin contraction was somewhat disappointing. Excluding fair value gains, operating profit was flat despite an 11% year-on-year revenue increase, as a larger headcount led to higher operating expenses. Hengli's headcount increased by 15% year-to-September, likely due to its geographic expansion in Mexico and research and development needs for its ball screw product expansion. We keep our revenue forecasts but reduce our 2024-28 operating profit forecasts by 5% to account for the lower operating margins. Consequently, we cut our fair value estimate by 3% to CNY 58 and consider the shares fairly valued.