Sanhua Intelligent Controls' Core Second-Quarter Results Were In Line; AI Liquid-Cooling Ramp-Up Will Be Key to Growth

Overview

This report reviews Sanhua Intelligent Controls' 2Q26 results and assesses the growth outlook for its auto-parts, traditional refrigeration, AI data center liquid-cooling, and robotics businesses. Morgan Stanley believes the core quarterly operating results were broadly in line with market expectations, but foreign exchange losses and aluminum-cost pressure caused profit and gross margin to decline. With progress in robotics slightly delayed, whether AIDC liquid-cooling revenue can ramp up smoothly has become the most important variable for future growth.

Core views

Sanhua Intelligent Controls' 2Q26 profit declined 7% YoY to Rmb1,116mn, broadly in line with market expectations. Morgan Stanley emphasizes that the decline was driven mainly not by a significant weakening in core operations, but by greater foreign exchange losses than in the same period last year. Excluding the foreign exchange drag, core results remained in line with expectations. The report therefore assesses currency effects separately from the performance of the core business and believes the quarter's results have only a limited impact on the existing investment thesis and consensus EPS expectations for the next 12 months. Revenue continued to grow. Total 2Q26 revenue increased 6% YoY to Rmb9.1bn. Morgan Stanley estimates that auto-parts revenue increased 6% YoY to Rmb3.3bn, while refrigeration-component revenue increased 7% YoY to Rmb5.8bn. Both major business segments achieved mid-single-digit growth, indicating that the automotive thermal-management and refrigeration businesses are still expanding, although the quarter did not yet deliver a growth surge sufficient to materially change earnings expectations. Profitability was affected by both raw-material costs and foreign exchange movements. The 2Q26 gross margin was 28.3%, down 1.0 percentage point YoY, mainly because of higher aluminum costs. The company used hedging and passed some costs on to customers, but these measures only partially offset the pressure. The lower gross margin, combined with larger foreign exchange losses, prevented revenue growth from translating into profit growth and ultimately resulted in a YoY decline in quarterly profit. The focus of growth drivers is shifting toward AI data center liquid cooling. Morgan Stanley believes the ramp-up of AIDC liquid-cooling revenue will be critical to driving future growth, while progress in the robotics business has been slightly delayed. This means the near-term incremental-growth thesis depends more heavily on the pace of liquid-cooling project execution and the conversion of orders into revenue, while contributions from the robotics business may take longer. The report does not provide a specific forecast for liquid-cooling revenue, but clearly identifies it as a core topic for the earnings call and subsequent monitoring. Whether management can maintain its full-year target of 15% YoY profit growth is also an important factor in assessing the strength of second-half growth. Morgan Stanley plans to focus on the demand outlook for refrigeration and new-energy-vehicle thermal-management components, progress in the AIDC liquid-cooling and robotics businesses, and whether management continues to stand by this full-year target. If the liquid-cooling ramp-up or improvement in demand for the core businesses is insufficient, achieving the full-year target may become more difficult. Conversely, faster liquid-cooling revenue growth, new customer orders for new-energy vehicles, or orders secured by the robotics business could all provide upside potential. Morgan Stanley's model forecasts EPS of Rmb1.02, Rmb1.12, Rmb1.35, and Rmb1.54 from 2025 to 2028, respectively. Over the same period, net revenue is forecast at Rmb31,012mn, Rmb33,894mn, Rmb39,149mn, and Rmb43,259mn, while ModelWare net profit is forecast at Rmb4,063mn, Rmb4,712mn, Rmb5,675mn, and Rmb6,453mn. EBITDA is expected to increase from Rmb5,970mn to Rmb8,566mn. The corresponding P/E ratio declines from 54.0x to 23.5x, P/B ratio from 6.5x to 3.1x, and EV/EBITDA from 32.2x to 15.2x. RNOA is 21.9%, 20.7%, 23.1%, and 24.1%, respectively, while ROE is 21.1%, 14.8%, 16.2%, and 16.5%, respectively. These forecasts reflect a modeled trajectory of continued revenue and profit growth alongside a gradual decline in forward valuation multiples. The target price of Rmb40.00 is derived using a DCF valuation, with key assumptions including a 12% WACC, a 14.5% cost of equity, a 6.3% cost of debt, and a 3% perpetual growth rate. Based on the closing price of Rmb36.14 on August 26, 2026, the target price implies 11% upside. Morgan Stanley assigns the company an Equal-weight rating and an In-Line industry view, indicating that it expects the stock's risk-adjusted total return over the next 12 to 18 months to be broadly in line with the average for its industry coverage universe.

Analysis framework

The report first compares 2Q26 profit and revenue with market expectations and the same period last year, then breaks down revenue from auto parts and refrigeration components and explains the effects of aluminum costs, cost pass-through, and foreign exchange losses on gross margin and profit. It then assesses future sources of growth based on demand for AIDC liquid cooling, robotics, new-energy-vehicle thermal management, and traditional refrigeration, using management's full-year profit-growth target as a validation point. Finally, Morgan Stanley uses ModelWare to forecast financial data and applies a DCF framework to calculate the target price and present upside and downside scenarios.

Methodology notes

• Valuation MethodDCF Discounted Cash Flow

  DCF Valuation

  The report determines the base-case target price of Rmb40.00 by discounting future cash flows to present value, using a 12% WACC and a 3% perpetual growth rate. The WACC incorporates a 14.5% cost of equity and a 6.3% cost of debt.

• Corporate Fundamentals and Financial Framework

  Morgan Stanley ModelWare Framework

  The report uses Morgan Stanley's ModelWare framework to forecast revenue, EPS, net profit, EBITDA, return metrics, and valuation multiples, thereby assessing the company's earnings growth and valuation changes from 2025 to 2028.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Zhejiang Sanhua Intelligent Controls (002050.SZ)

  The report views the company as an exposure to automotive thermal management, refrigeration components, and AIDC liquid cooling, with future growth focused on the ramp-up of AI data center liquid-cooling revenue.

  Strengths

  Auto-parts and refrigeration-component revenue increased 6% and 7% YoY, respectively, in 2Q26, while the company also has potential incremental growth from its AIDC liquid-cooling and robotics businesses.

  Weaknesses

  The 2Q26 gross margin declined 1.0 percentage point YoY, profit fell 7% YoY due to larger foreign exchange losses, and progress in the robotics business was slightly delayed.

  Comparison

  The Equal-weight rating means Morgan Stanley expects the company's risk-adjusted total return over the next 12 to 18 months to be broadly in line with the average for its China Autos and Shared Mobility coverage universe.

  Risks

  Key downside factors include weakness in China's property market, slowing global new-energy-vehicle demand, intensifying competition in the new-energy-vehicle business, and currency and export risks amid macroeconomic uncertainty.

Key data

• 2Q26 ProfitRmb1,116mnDown 7% YoY and broadly in line with market expectations, mainly weighed down by larger foreign exchange losses
• 2Q26 RevenueRmb9.1bnUp 6% YoY
• 2Q26 Auto-Parts RevenueRmb3.3bnMorgan Stanley estimates an increase of 6% YoY
• 2Q26 Refrigeration-Component RevenueRmb5.8bnUp 7% YoY
• 2Q26 Gross Margin28.3%Down 1.0 percentage point YoY, mainly due to higher aluminum costs
• Management's Full-Year Profit-Growth Target15% YoYThe report calls for monitoring whether management continues to maintain this target
• EPS ForecastRmb1.02 / 1.12 / 1.35 / 1.54Corresponding to 2025, 2026 estimate, 2027 estimate, and 2028 estimate, respectively
• Net Revenue ForecastRmb31,012mn / Rmb33,894mn / Rmb39,149mn / Rmb43,259mnCorresponding to 2025, 2026 estimate, 2027 estimate, and 2028 estimate, respectively
• EBITDA ForecastRmb5,970mn / Rmb6,393mn / Rmb7,612mn / Rmb8,566mnCorresponding to 2025, 2026 estimate, 2027 estimate, and 2028 estimate, respectively
• ModelWare Net Profit ForecastRmb4,063mn / Rmb4,712mn / Rmb5,675mn / Rmb6,453mnCorresponding to 2025, 2026 estimate, 2027 estimate, and 2028 estimate, respectively
• P/E Ratio54.0x / 32.2x / 26.7x / 23.5xCorresponding to 2025, 2026 estimate, 2027 estimate, and 2028 estimate, respectively
• P/B Ratio6.5x / 3.8x / 3.4x / 3.1xCorresponding to 2025, 2026 estimate, 2027 estimate, and 2028 estimate, respectively
• EV/EBITDA32.2x / 21.3x / 17.6x / 15.2xCorresponding to 2025, 2026 estimate, 2027 estimate, and 2028 estimate, respectively
• RNOA21.9% / 20.7% / 23.1% / 24.1%Corresponding to 2025, 2026 estimate, 2027 estimate, and 2028 estimate, respectively
• ROE21.1% / 14.8% / 16.2% / 16.5%Corresponding to 2025, 2026 estimate, 2027 estimate, and 2028 estimate, respectively
• Target Price and Closing PriceRmb40.00 / Rmb36.14The target price implies 11% upside; closing price as of August 26, 2026
• 52-Week Price RangeRmb60.77-29.18The 52-week range disclosed in the report
• Diluted Shares Outstanding4,200mnCurrent data disclosed in the report
• Current Market CapitalizationRmb151,776mnCurrent data disclosed in the report
• Current Enterprise ValueRmb138,062mnCurrent data disclosed in the report
• Key DCF Assumptions12% WACC; 14.5% cost of equity; 6.3% cost of debt; 3% perpetual growth rateUsed to value the base-case target price

Impact & implications

The report believes the quarter's results will not materially change the existing view because core results excluding foreign exchange losses were in line with expectations, while the direction of consensus EPS expectations for the next 12 months also remains broadly unchanged. However, the traditional automotive and refrigeration businesses maintained only mid-single-digit growth, while progress in the robotics business was slightly delayed. Growth expectations will therefore depend more heavily on the actual ramp-up of AIDC liquid-cooling revenue. Aluminum costs, cost pass-through capabilities, and exchange-rate movements will determine whether revenue growth can translate smoothly into profit.

Risks

• The upside scenario includes stronger-than-expected Tesla sales, particularly better sales performance in the Chinese market.
• The upside scenario includes higher-than-expected growth in air-conditioner sales.
• The upside scenario includes securing orders from new new-energy-vehicle customers.
• The upside scenario includes order breakthroughs in the robotics business.
• Downside risks include weak sales in China's property market weighing on residential HVAC demand, similar to the situation in 2015.
• Downside risks include a slowdown in global new-energy-vehicle demand.
• Downside risks include intensifying competition in the new-energy-vehicle business.
• Downside risks include currency and export pressure amid macroeconomic uncertainty.

What to watch

• Monitor the August 27, 2026 earnings call at 10:00 a.m. Hong Kong time for commentary on the demand outlook for refrigeration and new-energy-vehicle thermal-management components.
• Monitor the progress of AIDC liquid-cooling projects and revenue ramp-up, as well as the latest developments in the robotics business following the delay.
• Monitor whether management continues to maintain its full-year target of 15% YoY profit growth.