The hydraulic parts industry itself is a technology-intensive industry. Capital barriers and scale barriers determine that it is difficult for new entrants to enter this industry in the short term.

In 1795, Joseph Bramah applied for a patent for the hydraulic press, and since then the hydraulic industry has become an indispensable and important support in the field of machinery. With the rapid development of industries such as engineering machinery, automobiles, and aerospace after World War II, the requirements for transmission systems of related products have continued to increase. Hydraulics have gradually replaced mechanical transmission and become one of the most important energy transmission methods in modern industrial equipment, and have become one of the important indicators of the advanced level of mechanical equipment.

At present, 95% of engineering machinery and 90% of CNC machining in developed countries use hydraulic transmission technology. Compared with other new transmission methods, hydraulics have obvious irreplaceable advantages and are a high ground that major countries must compete for.

Domestic substitution is just in time

"Made in China 2025" includes five major projects: China's manufacturing innovation and construction project, intelligent manufacturing project, industrial base strengthening project, green manufacturing project and high-end equipment innovation project, and hydraulic parts are the core basic components in the industrial base strengthening project. "Made in China 2025" clearly states that by 2025, 70% of core basic components and key basic materials will be independently guaranteed, 80 iconic advanced processes will be promoted and applied, and some will reach the international leading level.

If the requirements of policy planning are to be achieved, the domestic hydraulic industry must accelerate the pace of domestic substitution in the next five years, because from the current situation, China is still relatively backward in the field of high-end technology. 70% of my country's high-end hydraulic products rely on imports, among which the import proportion of high-end hydraulic parts for high-end engineering machinery is even higher. About 80% of high-end hydraulic parts are controlled by others, and foreign hydraulic product manufacturers absorb about 70% of the profits. In fact, the development of the hydraulic industry is driven by local market demand and the strong technical research and development strength and process accumulation of enterprises. As an important branch of heavy industry, international hydraulic giants basically come from traditional manufacturing powers such as Germany, the United States, and Japan. The strong manufacturing heritage of old industrial countries provides a fertile soil for the growth of hydraulic giants. These leading companies include Germany's Bosch Rexroth, the United States Parker Hannifin, the United States Eaton, Japan's Kawasaki Heavy Industries, Japan KYB, Japan Nabtesco, etc.

If a strong industrial base and broad market demand are the cornerstones of the development of the hydraulic industry, then China currently has this condition. First, China is already the world's largest manufacturing country, and it is the country with the most complete industrial categories. Secondly, China itself has a strong domestic demand market, and in the future this market is likely to be much larger than the old industrial countries such as Europe, the United States, and Japan. According to data from the International Fluid Power Statistics Committee, the global sales of hydraulic parts reached 31.6 billion euros in 2019, the same as in 2018, and the global hydraulic industry has entered a relatively stable and mature stage.

In terms of development, the United States, China, Japan, Germany, and France are the top five countries in global hydraulic sales. The development trend in recent years shows that the hydraulic markets in the United States, China, and Europe have shown a steady expansion trend, and the expansion speed of the Chinese market is the most obvious. In 2019, the scale of China's hydraulic parts market reached 9.52 billion euros, a year-on-year increase of 4.9%, and its global market share increased rapidly from 27.7% in 2015 to 30.2% in 2019.

Hengli Hydraulics and Eddie Precision Duopoly

The hydraulic parts industry itself is a technology-intensive industry. Capital barriers and scale barriers determine that it is difficult for new entrants to enter this industry in the short term. In 2019, the market shares of Bosch Rexroth, Parker Hannifin, Eaton, Kawasaki Heavy Industries and other established companies were 19.7%, 9.7%, 7.2% and 5.7% respectively, with a total market share of 42.3%. The four companies accounted for nearly half of the global market share. The market shares of KYB, Nabtesco, Hengli Hydraulics and Aidi Precision in the second echelon were 3.3%, 1.4%, 2.2% and 0.6% respectively.

At present, my country's hydraulic parts industry presents a situation where there is a structural surplus of ordinary hydraulic parts and a structural shortage of high-end hydraulic parts. Most high-end hydraulic parts rely on imports. At present, the global market is monopolized by a few hydraulic manufacturers such as Bosch Rexroth and Kawasaki Heavy Industries, and they occupy a considerable share in the domestic market. There is a strong demand for domestic substitution.

Judging from the current situation, Hengli Hydraulics and Aidi Precision are two heavy punches for local companies in the hydraulic field in the future.

Hengli Hydraulics is a leading and benchmark enterprise in my country's hydraulic industry. After nearly 30 years of focus and innovation, the company has developed from a hydraulic cylinder manufacturer to a large-scale comprehensive enterprise integrating hydraulic components, precision castings, pneumatic components, hydraulic systems and other industries.

The company entered the fast lane of development after 2007. With the help of the explosion of demand for excavators in China and the rise of domestic brand excavators at that time, Hengli Hydraulics' performance grew rapidly. From 2008 to 2011, the company's operating income CAGR reached 56.43%, and the net profit CAGR was 51.21%. In 2012, the domestic construction machinery industry entered a downward period, but the company invested against the market and started a research project on pumps and valves. In the same year, Caterpillar entered the top five customers of Hengli Hydraulics for the first time, driving the company's overseas revenue to grow significantly, and the proportion of overseas revenue was therefore increased, which to a certain extent smoothed the performance risks brought about by the cyclical fluctuations in the domestic construction machinery industry. After 2016, with the start of a new cycle of construction machinery, Hengli Hydraulics' operating income has once again grown rapidly. From 2016 to 2018, the company's operating income CAGR was 75.32%, and the net profit CAGR was 245.78%. In 2019, the company's market share of excavator cylinders has reached more than 55%, making it an absolute domestic leader. The market share of hydraulic pumps and valves is about 20%, of which the market share of small excavator pumps and valves is close to 40%.

In 2021, the national excavator sales volume was 342,800 units, an increase of only 4.63% year-on-year. The company's excavator cylinder product sales revenue increased by 12% year-on-year, reflecting the company's continued increase in market share in the excavator field; in addition, the company's non-standard cylinder revenue increased by 24% year-on-year, far exceeding the growth rate of excavator cylinders, indicating that the company's product expansion downstream trend is still continuing; the company's hydraulic pump and valve product revenue increased by 38% year-on-year, reflecting the company's continued increase in market share in the excavator and non-excavator market.

Aidi Precision was established in 2003 and listed on the Shanghai Stock Exchange in 2017. The company's main business can be divided into breakers and hydraulic parts. Breakers are mainly used with hydraulic hosts to break and demolish hard objects such as buildings, reinforced concrete, rocks, roads, and bridge piers, while hydraulic parts are core components in engineering machinery products.

From 2015 to 2019, Aidi Precision's operating income increased from 317 million yuan to 1.442 billion yuan, with an annual compound growth rate of 46.04%, and its net profit attributable to shareholders increased from 52 million yuan to 342 million yuan, with an annual compound growth rate of 60.14%. At the same time, the company's profit margin has also increased year by year. From 2015 to 2019, the company's net profit margin was 16.38%, 19.85%, 21.78%, 22.06%, and 23.72%, respectively. With the improvement of profitability, the return on net assets of Eddie Precision has more than doubled from 12.09% in 2015 to 29.52% in 2019.

In 2020, the company achieved operating income of 2.255 billion yuan, a year-on-year increase of 56.38%; and realized a net profit attributable to the parent of 516 million yuan, a year-on-year increase of 50.82%, continuing to maintain high growth. In 2021, due to the ebb of the cycle, the company's profits declined, and the net profit attributable to the parent was 470 million yuan, a year-on-year decrease of 8.97%.

Looking ahead, there is still a lot of room for Eddie Precision's breaker business.

According to statistics from the Excavator Branch of the China Construction Machinery Industry Association, the 10-year stock of excavators in my country at the end of 2020 was about 1.825 million units. The future growth of the excavator market will drive the hydraulic breaker market to maintain a high prosperity. As of the end of 2020, the configuration rate of domestic excavator accessories was only about 30%, which is far behind the mature market. Among them, the configuration rate of excavator breaker hammers was 25%-30%, which is lower than the 30%-40% level in the mature market. The hydraulic demolition accessories market still has great potential. Eddie Precision is the absolute leader in the domestic breaker hammer industry. At present, about 60% of its production capacity is supplied to the main engine manufacturers. Its customers include well-known brands such as Sany and XCMG. Under the high prosperity of the hydraulic breaker hammer market, the company is expected to continue to benefit as a market leader.

The hydraulic industry is an industry with both financial barriers and technical barriers. Hengli Hydraulics and Eddie Precision have basically achieved a duopoly in China. From a competitive perspective, there is a high probability that no new entrants will pose a threat. This avoids the vicious competition of "civil war" to a certain extent. The two companies can focus on technological innovation and domestic substitution. It is entirely expected that they will continue to develop upward under the care of policies and the promotion of market demand.

(Source: Meicai.com)