Sanhua Intelligent Controls' 2Q26 revenue is better than feared, but earnings elasticity is still dragged by FX and raw materials

Overview

This report is Morgan Stanley's 2Q26 earnings preview for Zhejiang Sanhua Intelligent Controls (002050.SZ). The core judgment is that revenue is better than market fears: despite year-over-year declines in China's domestic EV and air-conditioner sales, the company may still achieve both year-over-year and quarter-over-quarter revenue growth. Growth drivers include strong China EV exports, double-digit year-over-year sales growth from major U.S. EV customers, and a higher mix of modular products.

Core views

The report's overall view is neutral. Positives include resilient EV components revenue, growth in the AIDC liquid cooling business, and a higher modular mix; negatives include weakness in residential cooling components, FX losses from RMB appreciation against the U.S. dollar, and margin pressure from rising copper and aluminum prices. Morgan Stanley expects 2Q26 revenue from EV and cooling components to be In-line, with the impact on consensus EPS for the next 12 months remaining broadly unchanged.

Analysis framework

The analytical framework focuses on 2Q26 revenue drivers, product mix, customer demand, FX, and raw material costs, combined with Morgan Stanley ModelWare forecasts, DCF valuation, and an assessment of the impact on consensus EPS for the next 12 months. The report also lists upside and downside risks to assess the key sensitivities for the target price and rating.

Methodology notes

• Valuation methodDCF valuation

  Discounted cash flow

  The target price is derived from DCF valuation, with key assumptions including 12% WACC, 14.5% cost of equity, 6.3% cost of debt, and a 3% perpetual growth rate.

• Earnings forecastMorgan Stanley ModelWare

  Internal model forecast

  The report states that, unless otherwise noted, metrics are based on the Morgan Stanley ModelWare framework, and some EPS metrics are based on the consensus methodology.

• Event impact assessmentKPI Surprise / EPS Impact

  Earnings preview impact assessment

  The report focuses on 2Q26 EV and cooling components revenue as key KPIs, judges their performance to be In-line, and believes the impact on consensus EPS for the next 12 months remains broadly unchanged.

Asset mapping & comparison

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

• Zhejiang Sanhua Intelligent Controls (002050.SZ)

  Subject company of the report

  Strengths

  Resilient EV components revenue, strong China EV exports, double-digit growth in sales to major U.S. EV customers, a higher modular mix, and growth in AIDC liquid cooling revenue.

  Weaknesses

  Weak residential cooling components, FX losses caused by RMB appreciation, and margin pressure from rising copper and aluminum prices.

  Comparison

  Compared with market fears, 2Q26 revenue performance is better; but relative to Morgan Stanley's sector coverage, the rating remains Equal-weight and the sector view remains In-Line.

  Risks

  Slowing global EV demand, intensifying competition in the NEV business, residential HVAC dragged by the real estate downturn, and FX and export risks.

• EV components business

  Revenue growth driver

  Strengths

  Benefits from China EV exports and sales growth from major U.S. EV customers.

  Weaknesses

  Sensitive to major customers and the global EV demand cycle.

  Comparison

  Compared with residential cooling components, EV components provide stronger support to 2Q26 revenue.

  Risks

  Slowing global EV demand, weaker-than-expected new customer orders, and intensifying NEV competition.

• AIDC liquid cooling business

  New growth driver

  Strengths

  Management targets more than 50% year-over-year growth in liquid cooling revenue in 2026, while expanding from primary-side to secondary-side components.

  Weaknesses

  Still in the realization phase of growth and sensitive to order conversion and customer expansion.

  Comparison

  Can offset part of the pressure caused by weak residential cooling components.

  Risks

  Changes in AIDC investment pace, weaker-than-expected order growth, and intensifying competition.

Key data

• Report date2026-07-13The cover timestamp is July 13, 2026 07:41 AM GMT.
• Stock ratingEqual-weightMorgan Stanley maintains a relatively neutral rating on the company.
• Sector viewIn-LineThe sector coverage is China Autos & Shared Mobility.
• Target priceRmb40.00The target price is based on DCF valuation.
• Reference share priceRmb43.20The disclosure table shows the price of Zhejiang Sanhua Intelligent Controls as of 07/10/2026.
• Implied upside/downside-7%The cover table discloses Up/downside to price target as (7).
• 2026e EPSRmb1.12The table lists 12/26e EPS.
• 2026e revenueRmb33,894mnThe table lists 12/26e Revenue, net.
• 2027e revenueRmb39,149mnThe table lists 12/27e Revenue, net.
• 2026 liquid cooling revenue target>50% YoYManagement reiterated its target of more than 50% year-over-year growth in liquid cooling revenue in 2026.

Impact & implications

The implication for the investment view is that near-term revenue risk is lower than market fears, but earnings improvement is not sufficient, and the rating and target price remain constrained by valuation, margins, and macro FX factors. If EV exports, Tesla-related sales, and AIDC liquid cooling orders continue to materialize, revenue expectations may be supported; if global EV demand slows, real estate weakness drags on residential HVAC, or competition in new energy vehicles intensifies, earnings and valuation may come under pressure.

Risks

• Declining sales in China's real estate market affecting residential HVAC demand.
• Slowing global EV demand.
• Intensifying competition in the NEV business.
• FX and export risks from RMB appreciation against the U.S. dollar and macro uncertainty.
• Rising raw material prices such as copper and aluminum pressuring margins.

What to watch

• Whether actual 2Q26 revenue achieves year-over-year and quarter-over-quarter growth.
• Trends in China EV exports and sales of major U.S. EV customers.
• Whether AIDC liquid cooling revenue growth reaches management's 2026 target of more than 50% year over year.
• The RMB/USD trend and the scale of FX losses.
• Changes in copper and aluminum prices and the effectiveness of the company's hedging.
• Progress in new EV customer orders and robotics business orders.