Energy storage business weighs on Envicool's second-quarter results; Goldman Sachs cuts earnings forecasts and target price but maintains Buy

Overview

The report analyzes the reasons for Envicool's weaker-than-expected 2Q26 results and reassesses the growth trajectories of its energy storage cooling, data center, and server liquid cooling businesses. Goldman Sachs believes the near-term downward revisions mainly reflect the energy storage business and domestic gross margin pressure, but mass production of overseas liquid cooling projects, accelerating domestic data center construction, and a more favorable regional mix should still drive growth and profitability improvements from 2H26 through 2027. It therefore maintains its Buy rating after lowering its earnings forecasts and target price.

Core views

Envicool announced its 2Q26 results after the market close on August 24, 2026. Quarterly revenue, gross profit, EBIT, and net profit were Rmb1,841mn, Rmb467mn, Rmb199mn, and Rmb176mn, respectively, representing year-over-year growth of 12%, 10%, 1%, and 5%, but coming in 10%, 17%, 19%, and 16% below Goldman Sachs' forecasts, respectively, and also below Visible Alpha consensus estimates. The report concludes that the weaker-than-expected revenue growth was mainly attributable to the energy storage system cooling business rather than data center and server cooling. Goldman Sachs had already assumed normalization in data center-related business growth and had not included a large-scale contribution from overseas liquid cooling projects in its 2Q26 forecast. The overseas business has begun to show early signs of liquid cooling project ramp-up. Overseas sales grew 71% year over year in 2Q26, significantly faster than the 11% growth in domestic sales. Despite the low base, overseas revenue already accounted for 15% of total quarterly revenue. Quarterly gross margin, operating margin, and net margin were approximately 25%, 11%, and 10%, respectively, each down 1 percentage point year over year but improving sequentially by 1, 6, and 9 percentage points, respectively. Intensifying competition in the domestic market pressured margins, although the improvement in regional mix partially offset the impact: the gross margin of the overseas business was 48.2% in 1H26, compared with only 21.0% for the domestic business. Goldman Sachs expects growth and margins to continue improving sequentially in the second half. It forecasts 3Q26E revenue and net profit of Rmb1,961mn and Rmb210mn, respectively, representing year-over-year growth of 35% and 15% and sequential growth of 7% and 19%. It forecasts 4Q26E revenue and net profit of Rmb2,914mn and Rmb315mn, respectively, representing year-over-year growth of 43% and 156% and sequential growth of 49% and 50%. The supporting factors are overseas liquid cooling entering mass production and accelerating domestic data center construction. The report also cites GDS and VNET's plans to deliver more capacity in 2H26E as an indicator of demand timing. Data center facility cooling is a relatively resilient business line. Related sales grew 26% year over year to Rmb1,700mn in 1H26, broadly in line with Goldman Sachs' expectations and management's previous guidance that the first half would be the off-season and domestic data center construction would accelerate in 2H26E. The overseas share of revenue for this business remains low, but it has grown significantly year over year. Goldman Sachs believes liquid cooling demand is the primary driver. The company disclosed that its quick connectors, manifolds, cold plates, coolants, and leak detection solutions have been initially adopted in batch volumes by several computing chip manufacturers and computing and switching equipment OEM customers. To address extremely high localized chip heat flux density, the company is also developing two-phase cold plates and jet impingement cold plates based on microchannel cold plates. Goldman Sachs expects sales growth in data center facility cooling and server cooling to accelerate from 24% in 1H26 to 44% in 2H26E, with 37% growth for full-year 2026E and 75% growth in 2027E, driven by mass production of overseas liquid cooling projects. The cabinet cooling business, which primarily corresponds to energy storage system cooling, was the main source of the earnings shortfall. Sales grew 15% year over year to Rmb1,068mn in 1H26, close to the 15% growth rate for full-year 2025 but below Goldman Sachs' previous forecast of 27% growth for full-year 2026E. The report believes that the shift from selling standalone chillers to integrated solutions comprising chillers, piping, connectors, and cabinets or containers has increased the value per system. However, this positive factor was partly offset by slower growth in the large-scale energy storage industries in China and the United States: installed energy storage capacity fell 28% year over year in China and rose 22% in the United States in 1H26, both weaker than the respective 52% and 48% growth rates in 2025. Goldman Sachs therefore revised its 2026E growth forecast for the segment to 19%. Margins remain under pressure. The 2Q26 gross margin was 25.3%, up 1 percentage point sequentially, but the company stated that intensifying competition and changes in product mix caused the domestic business's gross margin to decline by 2 percentage points year over year. Goldman Sachs also believes that a higher contribution from Chinese customers in the cabinet cooling business and rising raw material prices created additional pressure. The report expects the company's overall gross margin to recover to 27.6% in 2H26E and improve further in 2027E as high-margin overseas liquid cooling revenue accounts for a larger share. Based on the second-quarter results, domestic market gross margin pressure, and weaker-than-expected energy storage cooling sales, Goldman Sachs lowered its 2026E-30E net profit forecasts by an average of 14%. The forecast table shows that 2026E, 2027E, and 2028E revenue forecasts were reduced from Rmb9,704.3mn, Rmb15,340.1mn, and Rmb21,198.8mn to Rmb7,892.2mn, Rmb12,385.9mn, and Rmb18,093.4mn, respectively. Corresponding EPS forecasts were revised from Rmb0.78, Rmb1.51, and Rmb2.22 to Rmb0.56, Rmb1.20, and Rmb2.07, with new net profit forecasts of Rmb709.6mn, Rmb1,529.0mn, and Rmb2,644.0mn, respectively. Despite these downward revisions, Goldman Sachs continues to believe that generative AI investment will accelerate liquid cooling adoption and that the company's presence among Chinese hyperscale cloud providers and telecom customers, global energy storage cooling supply capabilities, and prospective growth and margin improvements make its current P/E valuation undemanding relative to the industry average. Goldman Sachs lowered its 12-month target price from Rmb84.62 to Rmb79.00, based on a 42x 2028E P/E multiple discounted to 2027E at a 10% cost of equity. Relative to the report's reference price of Rmb60.23, the target price implies 31.2% upside, and the rating remains Buy. The main downside risks identified in the report include slow R&D or business progress with key customers, intensifying competition in liquid cooling and pressure on margins, obstacles to energy storage demand growth, and geopolitical changes affecting global server, data center, and energy storage supply chains.

Analysis framework

Goldman Sachs first compares 2Q26 revenue, profit, and margins with its own forecasts and consensus expectations, and then breaks down the performance variance by energy storage cooling, data center and server cooling, and domestic versus overseas regional mix. It subsequently forecasts the business growth and margin trajectories for 3Q26E, 4Q26E, and 2027E based on liquid cooling project mass production, the pace of domestic data center construction, changes in energy storage industry installations, product value per system, and regional gross margin differences. Finally, it lowers its revenue, net profit, and EPS forecasts accordingly and recalculates the 12-month target price using a discounted 2028E P/E valuation method.

Methodology notes

• Valuation methodologyPE/PEG valuation

  Forward P/E target price method

  The report assigns a 42x P/E multiple to Envicool's 2028E earnings and discounts it to 2027E at a 10% cost of equity, deriving a 12-month target price of Rmb79.00.

• Industry/sector analysis frameworkSupply-demand framework

  Liquid cooling and energy storage cooling demand analysis

  The report assesses the demand timing of different cooling businesses based on overseas liquid cooling projects entering mass production, accelerating domestic data center construction, and changes in energy storage installation growth in China and the United States, and adjusts segment sales forecasts accordingly.

• Industry/sector analysis frameworkVolume-price decomposition

  Decomposition of business volume growth and product value per system

  For the energy storage cooling business, the report distinguishes between volume pressure caused by slower industry installation growth and higher product value resulting from the upgrade from standalone chillers to integrated solutions, explaining the segment's 15% growth.

Asset mapping & comparison

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

• Envicool (002837.SZ)

  A precision thermal management supplier for data centers, servers, and energy storage systems, which the report believes will benefit from generative AI-driven liquid cooling adoption and accelerating domestic data center construction.

  Strengths

  Its products have been widely adopted by Chinese hyperscale cloud providers and telecom customers, and it is an important supplier in the global energy storage cooling market. Overseas liquid cooling projects have begun to ramp up, and the overseas business's gross margin is significantly higher than that of the domestic business.

  Weaknesses

  Energy storage cooling sales were below expectations, while domestic market competition, product mix changes, customer regional mix, and rising raw material prices all pressure gross margins.

  Comparison

  Goldman Sachs believes the company's current P/E valuation is undemanding relative to the industry average and expects growth, margins, and returns to improve.

  Risks

  There is uncertainty surrounding the progress of key customer projects, liquid cooling competition and margins, energy storage demand, and global server, data center, and energy storage supply chains.

Key data

• 2Q26 revenueRmb1,841mnUp 12% year over year and 10% below Goldman Sachs' forecast
• 2Q26 gross profitRmb467mnUp 10% year over year and 17% below Goldman Sachs' forecast
• 2Q26 EBITRmb199mnUp 1% year over year and 19% below Goldman Sachs' forecast
• 2Q26 net profitRmb176mnUp 5% year over year and 16% below Goldman Sachs' forecast
• 2Q26 marginsGross margin 25.3%, operating margin 11%, net margin 10%All declined by approximately 1 percentage point year over year; sequentially improved by 1, 6, and 9 percentage points, respectively
• 2Q26 overseas salesUp 71% year over year, accounting for 15% of revenueDomestic sales grew 11% year over year, with overseas growth significantly faster
• 1H26 regional gross marginsOverseas 48.2%, domestic 21.0%A higher share of the high-margin overseas business should support subsequent margin recovery
• 1H26 data center facility cooling salesRmb1,700mnUp 26% year over year, broadly in line with expectations
• 1H26 cabinet cooling salesRmb1,068mnUp 15% year over year, below previous expectations; 2026E segment growth revised to 19%
• 3Q26E revenue and net profitRmb1,961mn / Rmb210mnUp 35% and 15% year over year, respectively, and 7% and 19% sequentially
• 4Q26E revenue and net profitRmb2,914mn / Rmb315mnUp 43% and 156% year over year, respectively, and 49% and 50% sequentially
• 2026E-30E net profit forecast revisionsCut by an average of 14%Reflecting the earnings shortfall, domestic gross margin pressure, and weaker-than-expected energy storage cooling sales
• New 2026E-28E EPS forecastsRmb0.56 / Rmb1.20 / Rmb2.07Previous forecasts were Rmb0.78, Rmb1.51, and Rmb2.22, respectively
• 12-month target priceRmb79.00Previous target price Rmb84.62; based on a 42x 2028E P/E multiple discounted to 2027E at a 10% cost of equity
• Price and potential upsideRmb60.23 / 31.2%The price stated in the report and the upside to the target price

Impact & implications

The report believes the weaker-than-expected second-quarter results require further downward revisions to energy storage cooling growth and domestic margins but do not alter the medium-term growth thesis for the liquid cooling business. If overseas liquid cooling enters mass production as planned and domestic data center construction accelerates in the second half, the rising share of high-margin overseas revenue should improve both revenue growth and margins. Therefore, although Goldman Sachs lowered its 2026E-30E earnings forecasts and target price, it maintains its Buy rating.

Risks

• R&D or business progress with key customers may be slower than expected.
• Competition in the liquid cooling market may intensify further and pressure margins.
• Growth in demand for energy storage systems may encounter setbacks.
• Geopolitical changes may affect global server, data center, and energy storage supply chains.

What to watch

• Monitor whether overseas liquid cooling projects enter mass production as planned and achieve order breakthroughs in 2H26.
• Monitor whether domestic data center construction and capacity delivery accelerate significantly in 2H26.
• Monitor whether sales growth in data center facility cooling and server cooling accelerates from 24% in 1H26 to 44% in 2H26E.
• Monitor whether the company's overall gross margin recovers to 27.6% in 2H26E and changes in the share of the high-margin overseas business.
• Monitor energy storage installation demand in China and the United States and whether the cabinet cooling business achieves its full-year 2026E growth forecast of 19%.