The market's linear assumptions regarding the profit timeline and valuation framework for liquid cooling have shifted.
Following the release of its annual and quarterly reports, industry leader Envicool encountered a significant sell-off resulting in a limit-down drop. Superficially, this was due to earnings falling short of expectations. On a deeper level, what was shattered was the market's previously almost linear projection: assured AI demand, rising adoption of liquid cooling, successful market positioning by the leader, leading inevitably to a continuous upward trajectory for orders, revenue, profits, and valuation.
However, the manufacturing sector rarely operates in such a straightforward manner.
Especially during the initial volume ramp-up phase in a new sector, companies often receive not profits first, but rather orders, production capacity pressures, advance funding requirements, extended payment terms, and price competition. The current issue with liquid cooling is not a lack of demand, but the fact that demand realization and profit realization are fundamentally different processes. More importantly, the market had prematurely priced a company still in its manufacturing expansion phase as if it were a high-margin, high-growth technology stock.
This is the true point of discussion arising from these financial results: what has been disproven is not the liquid cooling industry itself, but the market's linear assumptions about its profit timeline and valuation framework.
Is this a sector-wide trend or a company-specific issue? A common error when discussing liquid cooling is to immediately attribute a leading company's slowdown to a fundamental change in the sector's logic, or conversely, to explain away a company's short-term operational missteps by citing the sector's long-term potential.
Both views are overly simplistic. A more rigorous approach is to first separate the broader industry trend from the specific company's capabilities.
Regarding the industry: As part of AI infrastructure, liquid cooling is indeed in a phase of rapidly increasing adoption. This current surge is not due to novelty but is driven by physical constraints forcing industry upgrades. As chip power consumption continues to rise and rack heat density increases, air cooling is approaching its thermal limits. Liquid cooling is transitioning from an "advanced option" to a "practical necessity."
Data supports this: The penetration rate of liquid-cooled servers in China has risen from less than 3% in 2021 to an estimated 20% in 2025, projected to further increase to 37% in 2026 and potentially exceed 50% by 2027. Globally, liquid cooling penetration in AI data centers is expected to rise from 14% in 2024 to 33% in 2025, reaching approximately 40% in 2026.
From a hardware constraint perspective, this trend appears almost irreversible. Using the Nvidia platform as an example, the GB300 chip power consumption has reached the 135–140 kW level, with the next-generation Rubin architecture pushing even higher. Traditional air cooling has an upper limit around 50 kW in high-density scenarios, making it increasingly inadequate. For instance, an NVL72 GB300 rack utilizing cold plate liquid cooling can handle about 130 kW per rack, with further increases expected.
Economically, liquid cooling is also crossing an inflection point. In 10 kW rack scenarios, the total cost of ownership is already comparable or superior to air cooling. The advantage of cold plate liquid cooling becomes more pronounced at 30 kW, and further amplifies at even higher power densities with solutions like phase-change immersion cooling. Additionally, liquid cooling can typically lower Power Usage Effectiveness (PUE) to below 1.25, compared to often over 1.4 for traditional air cooling, a factor becoming increasingly critical amid tightening energy efficiency regulations.
Therefore, the demand logic for liquid cooling is sound and possesses strong certainty. Multiple institutions forecast the global liquid cooling market will reach tens of billions of RMB by 2026, with the Chinese market entering the billion-RMB level and continuing rapid growth into 2027. In other words, liquid cooling is not merely a thematic trend but a high-certainty growth segment within AI infrastructure.
The problem, however, is that certain demand does not equate to certain profits, and certainly not to immediately realizable profits.
This is the core mismatch—the market has been pricing "current performance" based on the "end-state potential."
The actual pace of the liquid cooling industry is much slower than imagined. The cycle from receiving orders, production, delivery, to final acceptance and revenue recognition inherently takes time. When combined with platform transitions, customer certification, yield ramp-up, and bidding processes, the realization of revenue and profits often lags significantly.
This explains why, despite the correct industry direction, the financial reports of related companies can initially disappoint the market.
Returning to the company level: Envicool's financials reveal not just industry-wide characteristics but also evident company-specific operational issues: the pace of capacity expansion, expense allocation, bad debt provisioning, cash flow management, and a misalignment between business structure and market expectations. These cannot be simply dismissed by stating "the industry is still in its early stages."
Therefore, the real question is not "is liquid cooling viable?" but rather, why did the market price a manufacturing company—where liquid cooling still contributes a relatively small portion of revenue, cash flow is already under pressure, and profit potential is far from realized—as a high-growth AI liquid cooling leader?
This question lies at the heart of the recent sharp decline.
Why did the leader encounter problems first? Because it received revenue growth first, not profits.
If looking solely at 2024, Envicool could still easily maintain market confidence. In 2024, the company reported revenue of 45.89 billion RMB, a year-on-year increase of 30.04%, and net profit attributable to shareholders of 4.53 billion RMB, up 31.59%. Superficially, both revenue and profit were growing. However, underlying risks had emerged: the full-year gross margin was 28.75%, down 3.6 percentage points year-on-year, and net operating cash flow was only 2 billion RMB, a decrease of 55.9%.
By 2025, this trend of "rising revenue but deteriorating profit quality" intensified. Envicool's annual revenue reached 60.68 billion RMB, up 32.23% year-on-year, but net profit attributable to shareholders grew only 15.30%. This marked the first time net profit growth significantly lagged behind revenue growth. Concurrently, gross margins continued to decline, and operating cash flow deteriorated further.
The point where problems converged and intensified was the first quarter of 2026. Envicool's Q1 revenue was 11.75 billion RMB, a 26.03% increase year-on-year, which appears reasonable. However, net profit attributable to shareholders plummeted to 8.6576 million RMB, down 81.97% year-on-year. After adjusting for non-recurring items, net profit was even lower at 5.3929 million RMB, a decline of 87.10%.
Why did profits collapse so severely? On one hand, financial expenses rose rapidly due to capacity expansion. Q1 financial expenses increased by 20.23 million RMB year-on-year, a surge of over 77 times. By the end of Q1, the balance of construction in progress stood at 322 million RMB, related to building production bases in Thailand, the US, and multiple domestic locations. Essentially, the company is expanding capacity for future markets, but the costs are impacting current profits first.
On the other hand, pressures from accounts receivable and asset impairment are mounting. Q1 credit impairment losses rose to 30.1572 million RMB from 7.5269 million RMB in the same period last year, primarily due to increased provisions for doubtful accounts receivable. Net operating cash flow was an outflow of 386 million RMB, compared to an outflow of 171 million RMB in the prior-year period, representing a deterioration of over 100%.
What does this indicate? It shows the company is not lacking orders, but is effectively trading longer payment terms, advance funding, and working capital for growth.
Another layer cannot be ignored: the market's perception of it as a "liquid cooling leader" is itself amplified. Estimates from foreign institutions suggest that in 2025, the company's liquid cooling business contributed only about 7% to 8% of total revenue. This means the market was pricing it as a "core beneficiary of AI liquid cooling," while its current business reality remains that of a comprehensive thermal management manufacturer where liquid cooling revenue contribution is not yet high, and profit realization is far from complete.
Therefore, these financial results cannot be simply attributed to "the entire liquid cooling industry being like this." A more accurate assessment is that the industry is indeed in a phase characterized by slow profit realization and intensifying competition, but this particular company is additionally facing operational challenges stemming from its own expansion pace, financial structure, and collection pressures.
What was truly dismantled is the valuation logic. A shift from a technology stock narrative back to a manufacturing sector valuation.
If the issue were merely poor profits, the market reaction might not have been so severe. The core problem is that the market had previously applied a valuation framework that did not fit the company.
Prior to the earnings release, Envicool's trailing twelve months (TTM) price-to-earnings (P/E) ratio was as high as 220.72, with a price-to-book (P/B) ratio of 30.77, and its total market capitalization once reached 118.3 billion RMB. This valuation did not correspond to a typical thermal management manufacturer, but rather resembled that of a high-margin, high-visibility, high-growth technology stock.
But what is the reality? On one hand, the contribution of the liquid cooling business to overall revenue is not as high as imagined. On the other hand, consecutive declines in gross margin, persistent deterioration in cash flow, and significant increases in impairment and financial expenses all indicate that the company is still in the "investing for scale, trading payment terms for orders" phase, not the "high-profit release" phase.
Thus, the issue is not merely that "the market misjudged once." If the market confirms this is not a high-net-margin technology business, but rather a high-growth, low-margin, capital-intensive, fiercely competitive manufacturing business, then this is not a short-term sentiment correction but a fundamental shift in valuation paradigm.
The difference is significant. A sentiment correction implies that after the decline, the stock could rebound based on the original logic. A valuation paradigm shift means the market will no longer apply the same valuation multiples going forward.
The typical valuation range for comparable industrial thermal control and equipment companies usually falls within a P/E band of 20–25 times. Even under relatively optimistic profit forecasts, if this company is ultimately reclassified by the market as a "high-growth manufacturer" rather than a "high-margin tech stock," its valuation anchor would systematically shift lower.
Liquid cooling clearly falls into the former category. The market's previous stance was not simply bullish on liquid cooling; it had prematurely imagined liquid cooling as a high-margin, high-visibility, high-growth technology business.
But based on the financial reports and industry chain structure, what does it currently resemble more closely? It resembles a typical Chinese manufacturing business.
Since liquid cooling itself has not been disproven, but rather its valuation logic and profit timeline have been rewritten, what should investors focus on next?
The following four questions are key to determining whether a liquid cooling company can genuinely navigate this period of market differentiation.
The significance of framing the analysis this way is that it transforms an "abstract question" into "trackable metrics." What truly deserves attention is not which company tells the most compelling liquid cooling story, but which company begins to show inflection points in these specific indicators.
Comments