J.P. Morgan: Sanhua Intelligent Controls: Liquid cooling and overseas operations support refrigeration growth, while automotive margins remain under pressure

Where is the improvement in profit mainly coming from?

Management said core operating profit would grow at a double-digit rate after excluding approximately 200 million yuan in investment losses and approximately 380 million yuan in foreign-exchange losses since the beginning of 2026.
Refrigeration was the main source of gross margin improvement: its gross margin rose approximately 1.5 percentage points year over year in the third quarter of 2026 and approximately 0.5 percentage points in the first three quarters. Data-center cooling, a higher share of high-margin products and improved production efficiency all contributed.
Domestic home-appliance demand remains under pressure, while overseas markets provide support: North American sales rose approximately 20% year over year in the third quarter of 2026.

Since the beginning of 2026, data-center cooling sales have totaled 1.8 billion to 2.1 billion yuan, accounting for approximately 8%–9% of refrigeration sales and 5% of group revenue. Management expects the business to grow approximately 50% year over year in 2026, driven mainly by more project opportunities and changes in the sales mix.
Primary-side products, including microchannel heat exchangers and valves, are already being supplied in volume to North American HVAC and equipment customers, with some orders secured through next year; secondary-side products, including plate heat exchangers and ball valves, are seeing more active project progress among data-center equipment suppliers and North American cloud customers.
As more projects ramp up, the company expects the share of secondary-side sales to continue rising and is considering adding capacity in Mexico and Thailand.

Management said automotive revenue is growing steadily, but customer demands for price cuts, currency movements and ramp-up costs at new factories, including those in Thailand, are weighing on gross margins; the automotive gross margin was flat to slightly lower in the third quarter of 2026.
Integrated products already account for more than half of automotive sales, helping support profitability. The company is also addressing the pressure through improvements in research and development, procurement and manufacturing, but management expects margin pressure to persist until new capacity is fully absorbed and currency volatility eases.
Looking ahead to 2026–2030, management has set a target for compound annual growth of 15%–20% in the automotive business, driven by electrification, heat pumps, product integration and intelligent modules; the target for the traditional home-appliance refrigeration business is approximately 10%, excluding liquid cooling and commercial refrigeration.

The company is expanding its robotics products, including body-joint actuators, finger-joint modules, thermal management and sensors, with some projects expected to enter mass production before the end of 2026. Management expects the robotics business to contribute revenue and profit in 2026, but its near-term impact will be limited relative to group sales exceeding 30 billion yuan.
J.P. Morgan believes progress in liquid cooling and robotics is ahead of market expectations and maintains its Overweight ratings on the A-shares and H-shares, with respective price targets for December 2027 of 51 yuan and 38 Hong Kong dollars. The bank also noted that global electric-vehicle demand, automotive industry competition and the pace of progress in robotics will affect its assessment.