Sanhua Intelligent Controls (Trans): Liquid cooling up >50%, FY target unchanged

Below is a Trans prepared by Dolphin Research for $Sanhua(002050.SZ) FY26 mid-year earnings call

I. Key takeaways

1) H1 overall: revenue of RMB 16.9 bn (+3.92% YoY). Net profit attributable to shareholders of RMB 2.044 bn (-3.12% YoY), with adj. net profit of RMB 2.147 bn (+6.82% YoY). GPM at 28.06%, roughly flat YoY.

2) By segment

a) Cooling & A/C components revenue of RMB 10.445 bn (+0.54% YoY). Segment net profit of RMB 1.144 bn (-11% YoY), though management said, on an adj. (ex-non) basis, segment profit rose by a few percentage points.

b) Auto components revenue of RMB 6.455 bn (+9.9% YoY). Segment net profit of RMB 0.9 bn (+9.34% YoY).

3) Two non-operating swings: investment MTM loss of RMB 179 mn and FX losses that were approx. RMB 290 mn higher vs. last year. Management said these were the major P&L drags; excluding them, growth was solid and even above the initial plan. Hedging ratio was lifted from ~30% at the start of the year to the low-50%s, and management expects FX volatility to be milder in H2 than in H1.

The company also took prudent impairments on certain custom auto lines that were idle or underutilized.

4) Full-year targets and outlook

a) Management reaffirmed the unchanged full-year target set at the start of the year (analysts referenced ~15% profit growth). They said the mid-year review did not lower the goal, as external shocks were viewed as temporary.

b) Full-year net profit growth is expected to outpace revenue growth. Auto should push toward double-digit growth, and Cooling is also set to grow, with a similar double-digit ambition. Management said they could not provide a quantified split by segment on the call.

II. Earnings call details

2.1 Management remarks

1) The opening remarks were brief and focused on H1 financials. Most business and strategy points were addressed during Q&A.

2) External environment: volatility increased in H1 2026, with Mideast tensions pushing up raw material costs and FX swings. These factors transmitted through and exerted pressure on operations.

3) Response and positioning: leveraging a global customer base, technology and innovation moats, cost discipline, mature global capacity, and fast-ramping new businesses, the company continued to reinforce its niches. Earnings resilience remained strong.

4) Management stressed that, stripping out macro headwinds, the long-term trajectory of steady growth remains intact.

2.2 Q&A

Q: Cooling posted much better YoY growth than the industry in Q2. Which products led and why?

A: Liquid cooling and traditional cooling are both driving growth, with sequential gains in revenue and profit in Cooling. First, the liquid cooling business for compute/data centers sits in the Cooling segment and grew significantly, offsetting near-term softness in China. Second, traditional cooling (residential, commercial, micro-channel) also saw sales growth.

Air conditioners and refrigerators are moving upmarket and becoming smarter, lifting per-unit component value. Extreme weather is boosting A/C penetration, especially in Europe and Southeast Asia, creating structural upside. Kitchen appliances, industrial refrigeration, and cold-chain also saw increases in value per unit and volumes, with higher requirements on safety and efficiency for key components.

Q: What was H1 revenue and growth for data center liquid cooling? Any new products?

A: Liquid cooling grew over 50% on last year's base and is designated a five-year strategic priority. Customers include North American and domestic cloud providers, Taiwan ODMs, and an established North American anchor account. On products, key launches on primary loops, secondary loops, and cabinet CDUs include motorized ball valves, proportional valves, air-release valves, cold plates, sensors, fittings, and manifolds.

Some have entered volume production, and key customers and projects should ramp in H2. Management is very bullish on this blue-ocean market and is investing heavily. Products sit across multiple BUs, with a dedicated taskforce coordinating domestic and overseas go-to-market.

Q: How do you view humanoid robots' outlook, core customer progress, and industrialization stage?

A: No specific robot customer or industrialization milestone was disclosed; management framed it within the three pillars of the new five-year plan. Beyond Cooling and Auto, bionic robots are the third growth curve. Cooling still has ample room to deepen, as new scenarios raise specs and value per unit, extending into home appliances, charging, and industrial intelligence.

In Auto, as intelligence and autonomy approach, per-vehicle component value will rise due to higher performance specs and new demand. Mideast energy shocks are pushing faster EV adoption in Europe and Southeast Asia, and as cars become mobile spaces, appliance-like features will increase. For robots, management is firmly optimistic and believes the value pool could eventually exceed that of today's NEV market.

Q: Industry cadence seems to be accelerating, with overseas core customers pushing hard. Does that align with what you see?

A: Orders exceed supply, and the company is urgently procuring equipment, with some SKUs worth RMB 50k–100k per unit. Management confirmed the pace is accelerating, and volumes are the key order criterion. Power ratings on both primary and secondary loops are rising, driving higher size and performance requirements.

Q: With H1 fair value and other noises, any change to full-year guidance?

A: The initial full-year target stands, and net profit growth should outpace revenue. Excluding investment and FX effects, growth is very strong and above plan. Management continues to push both growth and efficiency, and the mid-year review did not lower targets, judging external shocks as temporary.

Cooling, Auto, and new businesses including robots should increasingly offset risks.

Q: Domestic A/C demand fell, yet Cooling grew. Outlook?

A: Growth is driven by new businesses and adjacencies, while material substitution pressures ASPs but aids profits. Two factors drove domestic A/C softness: a high base last year and policy shifts. The company still grew, supported by new businesses and expansion into adjacencies and emerging products.

Material substitution also helped: with high copper prices, customers sought aluminum-for-copper and stainless-for-copper solutions. Leveraging years of know-how, the company captured stainless-for-copper demand, lifting penetration. Volumes rose, ASPs fell, but profits improved as value created for customers was shared, with limited impact on Cooling revenue growth.

The outlook for H2 remains positive. Key levers are domestic growth in new areas, energy-saving upgrades, and premiumization, aiming to outgrow the market and even peers.

Q: H1 saw notable FX and securities investment losses. Measures and H2 outlook?

A: Hedging ratio has been raised from ~30% to the low-50%s, and FX shocks should be milder in H2 than H1. FX affects both revenue and financial items. Two-pronged approach: balance sheet management by matching asset and liability currencies and selectively borrowing in EUR/USD, and setting BU-level hedge ratios for the next 12 months within a 30%–80% framework.

Pricing for many products is tied to FX, requiring joint judgment by finance and BU heads. The RMB moved from ~7.19 per USD last year to ~6.84 in H1, which had a sizable impact; the hedge ratio was lifted through May–Jun.

Q: Do contracts include FX renegotiation clauses?

A: Yes, but terms vary by customer, so hedging must be tailored per contract. Some are linearly linked to FX, some lock prices within ranges, and others settle first and adjust later. Pricing can be adjusted, and hedges may combine fixed and floating on a semiannual basis.

Q: Auto GPM dipped YoY in H1. Who are the top customers, and is annual price-down pressure easing or worsening?

A: No top-customer list disclosed; management noted a slight increase in key accounts and said GPM remains within a normal band. NEV competition is intense and vehicle ASPs are falling, pressuring industry profits and revenue. However, the company has endured similar cycles in appliances, focusing on product strength across technology, process, equipment, and delivery.

While GPM declined, it stayed within normal volatility. Management did not provide names or shares for top customers, only noting a slight increase vs. last year.

Q: For liquid cooling capacity, will you keep exporting from China or also build overseas?

A: Customers currently care more about delivery than origin; overseas bases can be switched quickly. Management places high priority on liquid cooling, with significant step-ups in H1 and an international footprint ahead of some peers. Today, customers mainly want shipments, whether from Mexico, Vietnam, Thailand, or China.

As growth continues, the company can pivot capacity quickly, given its process capabilities and overseas plants. They also believe that while North America is ramping fast, China will also become sizable.

Q: Were investment losses mainly from hedging or from listed equity investments in Hong Kong?

A: Mainly fair value changes on equity investments, while hedging actually delivered tens of millions in gains. FX changes flowed through financial expenses under accounting rules, with H1 losses a bit over RMB 200 mn and hedging contributing positive gains. Investment income and FV changes were driven mostly by equities.

Management referred investors to the interim report for details.

Q: Can the 15% profit growth target be split between Cooling and Auto?

A: No segment split provided; both segments are targeting double-digit growth. Ex non-operating items, Auto should firmly push toward double-digit growth for the year. Cooling is also on a growth track, but management would not quantify on the call.

Highlights in H1 Cooling included liquid cooling and revenues from new emerging areas. External uncertainties remain, and delivery will depend on execution in new products and fields.

Q: Liquid cooling grew over 50% in H1. What is the approximate absolute amount?

A: Roughly RMB 0.8–1.0 bn, referring only to compute/data center, excluding storage. Management noted ongoing improvements in customer tracking, with overlapping customers from T2 to T1 to end users making penetration tracking difficult. They are enhancing project source management.

Q: For storage-related products, is production domestic or overseas?

A: Both domestic and overseas, allocated by customer needs and ROI. Storage is progressing well, with new opportunities coming in this year. Given large customer volumes, capacity is allocated to maximize delivery and returns.

Q: Are robot deliveries entirely from China now, or are some shipped from Thailand?

A: Delivery origin is secondary as long as shipments can be met; North America is 'possible' in the future. The company entered the sector around 2022, building IP and teams with a few key customers, and 2024 is seen as the mass-production start. Moving from 0–1 to 1–100 requires engineering of equipment, labor, process, quality, and supply chain.

Global footprints are in place, with some prep in Thailand and a potential move toward North America depending on customer needs. All steps will follow customer demand.

Q: For that customer, what is the delivery cadence and ramp speed this year?

A: No disclosure due to NDAs; customer communications prevail. Articles in the market are not reliable sources, and execution must follow commercial logic. Management referenced the NEV ramp as an analogy, moving from manual to semi-manual to automated as technology converges.

Q: How is liquid cooling governed? Any unified management?

A: Positioned as T2 components across roughly five BUs, with no current plans to integrate at the system level. Pumps and valves, cold plates, and sensors share core technologies with existing products, requiring quick adaptation; some need minimal R&D, while higher cleanliness needs extra investment. Overall, projects are short-cycle and fast.

Products are distributed across about five BUs with full-stack capabilities. A key account manager model is in place, with a North America office and a domestic taskforce led by a senior PhD, under the CEO's direct push. Some customers suggested the company could do CDU integration, but this involves strategic trade-offs and is not currently pursued.

Management sees the market in a 'firehose' phase, with future upgrades to energy efficiency likely to reshape system design.

Q: Any new capacity plans for liquid cooling and robots?

A: Liquid cooling can respond quickly via debottlenecking and retrofits within existing capacity, while robot capacity is already in place. Liquid cooling shares high overlap with existing product lines in process and equipment, enabling quick response through internal upgrades and selective new capacity. For robots, significant resources have been invested since 2022, with proceeds from the H-share raise funding capacity and R&D in China and overseas.

Currently, demand is driven by delivery capability, but thermal system efficiency will matter more later. Today 'cooling suffices', but later heat-exchange efficiency, akin to A/C energy ratings and COP, will be emphasized. North America is ramping faster, while China is earlier stage but supported by Gov. funding, and the domestic supply chain should catch up quickly.

Q: Auto GPM fell but net margin rose YoY in H1. Was this mainly lower opex, or other factors?

A: Scale effects crossed a threshold, with lower opex ratio offsetting GPM pressure. The industry remains highly competitive, so management prioritizes operating and administrative efficiency beyond GPM. Scale benefits are emerging, with revenue growth outpacing expense growth, limiting the impact from GPM decline.

GPM has actually trended up over the past two years; the recent dip also reflects FX. Ex FX, the underlying trajectory remains upward. Prudently, impairments were recorded on some idle or underutilized custom auto lines in H1.

Q: Any new customers or product needs in NEV thermal management?

A: New customers are few; incremental growth mainly comes from integrated products lifting per-vehicle value. Penetration is already high across major global OEMs and programs for both integrated modules and components. With severe industry consolidation, some customers may exit, so the focus has shifted to ROI and high-margin projects, with stronger risk management.

Incremental gains come from existing areas as integrated solutions gain share, raising per-vehicle value. With autonomous driving, requirements on intelligent components and thermal management for efficiency, functionality, and safety will keep pushing value higher.

Q: How do rising copper and other metals affect costs and pass-through?

A: Copper-linked pricing is in place with major customers, limiting impact on overall GPM. Macro moves in H1 included FX and commodity swings, with AI-related builds driving demand. Copper usage is heaviest in Cooling for home appliances.

With major customers, product prices are linked to copper, so the recent surge has limited impact on GPM. Some exceptions exist in commercial markets, which prefer fixed prices given higher margins. The company has engaged those customers with several proposals.

Overall, copper's rise should have a limited and manageable impact, with AI demand being the main driver. <End of text>

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