SHENZHEN ENVICOOL TECHNOLOGY(002837)：4Q25/1Q26 RESULT MISS; CAPACITY EXPANSION AND SERVER COOLING READINESS POINT TO 2H26 ACCELERATION; CUT TP BUT MAINTAIN BUY

We maintain our Buy rating on Envicool after attending the company’s onsite earnings briefing & factory visit in Zhongshan and hosting a group investor call with management where they discussed their outlook on April 21, 2026. Meanwhile, we cut TP to Rmb110.0 (vs. Rmb118.6 previously) to reflect the result miss (link to our first-take report). While 1Q26 results reflect typical seasonality and temporary business headwinds such as domestic chip shortages delaying data center room cooling deployments and accounting-driven credit impairments, the company’s underlying fundamentals and order backlog remain solid in our view. We view 2026 as a transition year, where initial subdued growth will give way to a notable acceleration in the second half. Per company, their optimism in 2H26 performance is underpinned by the anticipated scale-up of overseas server cooling orders, the rollout of higher-value integrated ESS cooling packages, and structural margin improvement driven by a favorable shift toward overseas revenue. With aggressive but disciplined capacity expansions now largely in place, we believe Envicool remains well-positioned to capture the robust global liquid cooling demand. Key takeaways and management guidance provided during the earnings briefing:
Potential 2H26 revenue acceleration: The relatively small revenue scale in 1Q26 reflects normal business seasonality and is not indicative of the company’s full-year trajectory or broader industry trends, per company. Management anticipates an acceleration in total revenue yoy growth starting in 2Q26, primarily driven by the conversion of previously delayed domestic data center projects into recognized revenue. While the overseas revenue mix in 1H26 is expected to remain consistent with historical patterns, management projects a more pronounced shift in 2H26. The company noted that from a full-year perspective, the overseas revenue contribution is expected to increase significantly in 2H26, which should serve as a meaningful catalyst for overall GPM improvement. We expect 25%/90%/82% yoy sales growth in 2Q-4Q26E.
Server cooling business outlook remains positive: Management reiterated high confidence in achieving strong full-year segment sales growth. Consistent with previous guidance, few large-scale orders were expected in 1Q26; instead, major volume opportunities, such as the CDU project for Google and other key clients, will likely materialize more visibly in 2H26, per management. Collaborative efforts with various clients across R&D, product finalization, and supply chain alignment are progressing smoothly. To address the capacity constraints that limited quick disconnect (QD) shipments through early 2026, the company rapidly expanded its QD production lines between late 2025 and 1Q26. With capacity bottlenecks resolved, future shipment volumes will largely depend on client deployment schedules. Furthermore, Envicool is actively broadening its technology portfolio: (1) expanding cold plate applications beyond CPUs and GPUs to include memory, SSDs, and optical modules; (2) developing advanced two-phase and jet impinging cold plates to handle ultra-high heat flux densities; and (3) providing full-life-cycle solutions, such as lab testing systems, mobile vacuum liquid filling tools, and emergency cooling equipment to assist clients in R&D and rapid deployment. We believe these comprehensive initiatives support management’s optimistic outlook for 2027 as well, seeing further penetration across new clients, product categories, and application scenarios into next year. We model Rmb2.0bn/Rmb5.3bn server cooling sales in 2026E/27E.
Capacity preparation and site visit: During our site visit to the Zhongshan factory, we observed multiple highly automated production lines for server cooling products, including QDs, manifolds, cold plates, and CDUs. In our view, the facility operates at a fast production tempo and is equipped with a comprehensive range of equipment— many of which are customized, in-house developed, or feature secondary developments based on proprietary know-how, covering both core manufacturing processes and rigorous testing protocols. Management expressed confidence that, supported by early client forecasting, the company can rapidly scale production globally to meet sudden placement of large-scale orders. In 2026, Envicool is continuing to build out “effective capacity”, i.e. capacity explicitly aligned with recognized client demand, with ongoing expansions across its Zhongshan, Zhengzhou, Shenzhen, Thailand, and the US production facilities.
Data center room cooling business saw near term hiccup: Starting in 2H25, the construction pace of domestic data center projects has decelerated, caused by chip supply constraints. This delay in customers’ project implementation was a primary factor behind the slower yoy total revenue growth recorded in 4Q25 and 1Q26. However, underlying demand from domestic clients remains highly resilient, and the company noted solid order backlog in 1Q26. Management maintains a more optimistic outlook for this segment in 2026 compared to 2025, anticipating that chip supply constraints will gradually ease. Although a material change in the domestic construction pace has not yet been observed as of April, the company expects project implementation to accelerate later in the year, particularly heading into 2H26. We look for 40%/35% segment growth in 2026E/27E.
ESS cooling segment performance below expectations but with company’s mitigation efforts: Envicool’s ESS cooling revenue growth lagged behind global ESS installation growth (measured in GWh) in 2025 due to: (1) a 2-3 quarter lag between industry installations and Envicool’s revenue recognition, (2) a trend toward longer storage duration (which aligns cooling revenue more closely with GW power ratings rather than GWh capacity), (3) a high base effect from 1H25 when domestic firms front-loaded exports to North America, and (4) ASP compression amid severe domestic competition. Additionally, the company strategically walked away from domestic projects with low margins or high cash collection risks. Looking into 2026, per management, ESS cooling revenue is poised to re-accelerate, as the company is evolving its business model from selling standalone chillers to offering integrated packages (including chillers, pipes, connectors, cabinets/containers), which significantly increases the revenue value per project. This expanded portfolio generated small batch contributions in 1Q26 and will scale further in 2Q26, per management. While this integrated package strategy may dilute GPM of the overseas business, it will drive absolute revenue and gross profit higher, per the company. Finally, management noted that OBBBA restrictions pose minimal risk to the ESS cooling segment, as thermal management accounts for a small fraction of the total ESS system costs, and Envicool has already established localized capacity in the US and Thailand to support clients’ compliance needs. We expect 30%/28% segment growth in 2026E/27E.
GPM fluctuations within normal range: In 4Q25, the overall gross margin improved yoy and remained flat qoq at 29%, largely driven by a margin uplift in the data center room cooling segment due to a higher revenue mix from Southeast Asian projects. Conversely, the 2pp yoy gross margin decline in 1Q26 represents a normal short-term fluctuation, resulting from a combination of increased depreciation from new facilities, product mix variations, FX impacts, and elevated commodity prices. Looking ahead to the full year 2026, management expects the blended gross margin to increase meaningfully as the higher-margin overseas revenue accounts for a visibly larger share of total sales in 2H26E.
Non-operating items: The credit impairment losses recorded in 4Q25 and 1Q26 were primarily driven by the slowdown in domestic data center construction since 2H25. This slowdown extended settlement cycles, causing the accounts receivable for certain large clients to age and cross into higher provision brackets. Notably, the 1Q26 impairments were heavily tied to data center clients; however, management views these receivables as high-quality assets backed by strong domestic AI demand, implying low ongoing default risk once construction resumes. The goodwill impairment in 4Q25 was isolated to the rail transit cooling business, which has been impacted by local government fiscal constraints that have slowed subway construction. Additionally, the yoy increase in finance costs during 1Q26 was largely attributable to FX losses on foreign currency receivables, stemming from RMB appreciation.
Earnings and TP revisions: Factoring results and management guidance, we cut our 2026E-30E net income forecasts by 18% on average to reflect (1) the results, (2) delayed domestic data center project constructions, (3) ESS cooling sales growth slowdown, while we remain constructive on the server cooling business progress towards 2H26. Accordingly, our TP moves to RMb110.0 (vs. Rmb118.6 previously), based on 2028E P/E of 42x (unchanged) discounted back to 2027E (vs. discounted back to 2026E) with a COE of 10% (unchanged) as we roll over the valuation. Maintain Buy.
Investment Thesis - Shenzhen Envicool Technology
We are Buy-rated on Envicool. The company specializes in precision cooling technology, helping critical loads (e.g., data centers, servers, and energy storage systems) to operate in a highly controlled temperature/humidity environment, thereby enhancing their power usage efficiency (PUE) and reducing the total cost of ownership. We believe the digital economy and carbon reduction are long-term global focuses, and technologies – such as precision cooling – that enable and improve energy utilization efficiency will be increasingly adopted to achieve these development goals. Envicool’s data center technology and products have been widely adopted by Chinese hyperscalers and telco customers. It is also a major supplier of cooling systems in the global energy storage market. With increasing attention on and investment in generative AI, we believe liquid cooling adoption will see a rapid pick-up, driving strong revenue growth in data center room cooling and server cooling for Envicool. We are bullish on Envicool capturing the surging global server liquid cooling demand and expect the company to take a 7% global server liquid cooling market share in 2028E and 10% by 2030E. We view current stock valuation as undemanding (on a current P/E basis) compared to our sector average, with a strong growth trajectory and an improvement in its margins/return profile.
Price Target Risks and Methodology - Shenzhen Envicool Technology
Valuation: Our 12-month target price of Rmb110 is based on a 42x 2028E P/E discounted back to 2027E with a 10% cost of equity.
Downside risks: (1) Slow R&D/business progress with key customers; (2) tougher liquid cooling competition and margin risks; (3) ESS demand growth hiccups; (4) geopolitical changes impacting the global server/data center and ESS supply chain.
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