Envicool emerged from its trough in the second quarter, with revenue recovering but the product mix still weighing on earnings

Overview

The report reviews Envicool's 1H26 and 2Q26 results. Its core view is that the company's revenue has recovered from the 1Q26 trough, supported by rising global AIDC liquid-cooling penetration and expanding overseas sales. However, an unfavorable product mix and competitive pressure are diluting gross margin, so earnings growth in 2H26F may continue to lag revenue growth. Nomura maintains its Buy rating and CNY125.00 target price.

Core views

Envicool announced its 1H26 results after the market closed on 24 August 2026. 1H26 revenue was CNY3,017mn, up 17.2% YoY, but attributable profit was CNY185mn, down 14.3% YoY, indicating that revenue growth had not yet fully translated into earnings. In 2Q26 alone, revenue was CNY1,841mn, up 12.2% YoY, while attributable profit was CNY176mn, up 5.1% YoY. Due to the low 1Q26 base, 2Q26 revenue and attributable profit increased 56.7% and 1,933.6% QoQ, respectively, supporting the report's view that the business is recovering from its trough. Profitability remains the main constraint. 1H26 gross margin was 24.9%, down 1.2 percentage points YoY; 2Q26 gross margin was 25.3%, down 0.6 percentage points YoY but up 1.0 percentage point QoQ. Nomura believes the YoY decline was mainly attributable to an unfavorable product mix, with a greater contribution from low-margin products. Although the 2Q26 operating margin recovered significantly QoQ to 11.7%, the attributable net margin was 9.6%, still down 0.7 percentage points YoY, indicating that the revenue recovery and margin improvement were not occurring in tandem. By business segment, 1H26 revenue from the cabinet, IDC facility, rail transit, and new energy vehicle businesses increased 15.3%, 25.8%, 17.4%, and 10.0% YoY, respectively. The report believes that solid performance in energy-storage and IDC liquid-cooling solutions was an important source of segment revenue growth. However, the cabinet business's gross margin declined 1.3 percentage points YoY, mainly due to changes in the regional sales mix of the energy-storage business; the IDC facility business's gross margin declined 2.5 percentage points YoY due to factors including intensified competition and a higher share of lower-margin products such as electronic-component cooling. Therefore, the faster-growing businesses are also important sources of margin dilution. Industry demand continues to provide medium-term support. The report cites TrendForce's forecast that liquid-cooling penetration in AI chips will reach 53% in 2026E and approach 60% in 2027E. Despite intense competition in China and global markets, Nomura believes Envicool can still benefit from rising adoption of liquid cooling in global AIDC. The overseas business has already demonstrated strong growth: 1H26 overseas revenue increased 71.4% YoY to CNY444mn, indicating that the company's revenue drivers extend beyond the Chinese market. For 2H26F, the report expects revenue to continue recovering, but earnings growth will remain under pressure from gross-margin dilution. The rationale is that rising liquid-cooling penetration and overseas expansion will drive sales, while competition, pricing pressure from key customers, and a higher share of low-margin products will constrain profit growth. Nomura therefore maintains its Buy rating but explicitly notes that a revenue recovery does not necessarily imply a simultaneous acceleration in earnings. Regarding valuation, Nomura uses a DCF methodology, assuming a WACC of 10.9% and a terminal growth rate of 4%, and maintains its CNY125.00 target price. The target price corresponds to 39x FY27F P/E, based on FY27F EPS of CNY3.18; the report lists the share price on 24 August 2026 as CNY54.75 and uses the CSI 300 as the valuation benchmark index.

Analysis framework

The report first compares revenue, profit, and margin performance in 1H26 and 2Q26, using YoY and QoQ data to determine whether the company emerged from its first-quarter trough in the second quarter. It then breaks down the cabinet, IDC facility, rail transit, and new energy vehicle businesses to analyze the sources of growth and changes in segment gross margins. Next, it assesses subsequent demand by considering liquid-cooling penetration forecasts and overseas revenue performance. Finally, it combines the revenue recovery with product mix, competition, and pricing pressure to formulate its 2H26F earnings outlook and uses a DCF to determine the target price.

Methodology notes

• Valuation methodologyDCF discounted cash flow

  DCF valuation

  The report discounts the company's future cash flows to present value and applies a WACC of 10.9% and a terminal growth rate of 4% to derive a target price of CNY125.00.

• Company fundamentals and financial frameworkEarnings quality analysis

  Cross-validation of revenue, profit, and margins

  The report concurrently compares revenue growth, attributable profit growth, gross margin, and net margin to determine whether the revenue recovery can translate into earnings growth and to identify margin dilution caused by the product mix.

• Company fundamentals and financial framework

  Breakdown of revenue and gross margin by business segment

  The report breaks down revenue growth across the cabinet, IDC facility, rail transit, and new energy vehicle businesses and combines it with changes in segment gross margins to identify the sources of growth and earnings pressure.

• Industry/sector analysis framework

  Liquid-cooling penetration trend analysis

  The report uses liquid-cooling penetration forecasts for 2026E and 2027E to assess the direction of AIDC demand and links higher industry adoption to Envicool's future revenue opportunities.

Asset mapping & comparison

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

• Envicool (002837CH)

  Rising global AIDC liquid-cooling penetration and overseas business expansion support the company's revenue recovery, but a higher share of low-margin products may dilute earnings.

  Strengths

  Energy-storage and IDC liquid-cooling solutions delivered solid growth, 1H26 overseas revenue increased 71.4% YoY, and the cabinet, IDC facility, rail transit, and new energy vehicle businesses all achieved revenue growth.

  Weaknesses

  1H26 attributable profit declined 14.3% YoY, and gross margin declined 1.2 percentage points YoY; gross margins in both the cabinet and IDC facility businesses were under pressure.

  Comparison

  The report does not provide quantitative comparisons with specific peers but notes intense competition in the liquid-cooling markets in China and globally.

  Risks

  Liquid-cooling penetration falling short of expectations, intensifying domestic liquid-cooling competition, rising pricing pressure in key customer segments, and worsening geopolitical risks.

Key data

• 1H26 revenueCNY3,017mnUp 17.2% YoY and down 13.7% from 2H25
• 1H26 attributable profitCNY185mnDown 14.3% YoY
• 2Q26 revenueCNY1,841mnUp 12.2% YoY and 56.7% QoQ
• 2Q26 attributable profitCNY176mnUp 5.1% YoY and 1,933.6% QoQ, with the QoQ increase affected by the low 1Q26 base
• 1H26 gross margin24.9%Down 1.2 percentage points YoY
• 2Q26 gross margin25.3%Down 0.6 percentage points YoY and up 1.0 percentage point QoQ
• 1H26 revenue growth by business segmentCabinets +15.3%; IDC facilities +25.8%; rail transit +17.4%; new energy vehicles +10.0%All figures are YoY growth rates
• 1H26 changes in gross margin by business segmentCabinets -1.3 percentage points; IDC facilities -2.5 percentage pointsAll figures are YoY changes, affected respectively by the regional sales mix, competition, and a higher share of low-margin products
• 1H26 overseas revenueCNY444mnUp 71.4% YoY
• Liquid-cooling penetration forecast53% in 2026E; approaching 60% in 2027ETrendForce's forecast for liquid-cooling penetration in AI chips
• DCF parametersWACC 10.9%; terminal growth rate 4%Used to calculate the target price
• Implied target-price valuation39x FY27F EPSFY27F EPS is CNY3.18, and the target price is CNY125.00

Impact & implications

The report believes that rising adoption of liquid cooling in global AIDC and rapid growth in overseas revenue are likely to drive a continued recovery in Envicool's revenue. However, because business growth is increasingly derived from low-margin products and is accompanied by changes in the regional sales mix, competition, and pricing pressure, profit growth may continue to lag revenue growth. Nomura therefore maintains its Buy rating and CNY125.00 target price while emphasizing that margin performance in 2H26F is key to realizing the growth thesis.

Risks

• Penetration of liquid-cooling solutions in China and global markets is slower than expected.
• Competition from other Chinese liquid-cooling companies intensifies further.
• Pricing pressure increases in key customer segments such as data centers, telecommunications, and new energy.
• Geopolitical risks are worse than expected.

What to watch

• Monitor whether revenue in 2H26F can sustain the recovery trend seen since the second quarter.
• Monitor the impact of the share of low-margin products, the regional sales mix, and changes in competition on gross margin.
• Monitor whether liquid-cooling penetration in AI chips can reach 53% in 2026E and approach 60% in 2027E.
• Monitor whether overseas revenue can sustain growth after increasing 71.4% YoY in 1H26.
• Monitor whether gross margins in the cabinet and IDC facility businesses can stabilize.