Key Takeaways
A sharp first-quarter profit collapse at a key supplier for Nvidia’s Blackwell platform is testing investor faith in the AI-driven liquid cooling boom.
Inovance Technology (SHE: 300741), a leading Chinese maker of thermal management systems for data centers, saw its stock fall by the 10% daily limit after reporting that first-quarter net profit plunged nearly 82%, signaling severe growing pains from its rapid expansion to meet AI demand. The company’s stock closed at 108.97 yuan on April 21, wiping out over 10 billion yuan in market value.
"The first quarter's financial performance represents phased pressure," Tang Rulin, head of Huaxin Consulting's AI Integration Research Institute, said in a media interview. He added that the key to a recovery hinges on whether the company can successfully deliver on its large order book in the second quarter.
The dramatic profit decline to 8.7 million yuan came even as revenue grew 26% to 1.18 billion yuan. The results stemmed from a combination of factors, including a 7,761% surge in financial expenses due to higher interest costs for expansion and a four-fold increase in credit impairment losses. The company's gross margin has also compressed for two consecutive years, falling from 32.35% in 2023 to 27.86% in 2025, pressured by rising copper prices that it cannot fully pass on to large customers like Tencent and Alibaba.
The results cast a shadow over the high-growth liquid cooling sector, a critical enabler for power-hungry AI chips from Nvidia and Intel. While Inovance holds key certifications as a solutions provider for Nvidia's Blackwell platform and Intel's Xeon 6, its struggle to convert top-line growth into profit highlights the high cost of scaling and intensifying competition.
A deeper look at the financials reveals the extent of the cash strain. Inovance’s operating cash flow was negative 386 million yuan for the quarter, a 126% wider deficit than the previous year. This was driven by payments to suppliers and a near doubling of capital expenditures to 126 million yuan as the company races to build new production facilities in Suzhou, Zhongshan, and Zhengzhou. The gap between high upfront investment and the eventual revenue from liquid cooling deliveries is at the core of the current earnings pressure.
While the long-term demand for liquid cooling appears robust, with Dongwu Securities forecasting an 80 billion yuan global market by 2026, the field is becoming crowded. The sector’s high-growth prospects have attracted numerous new entrants, shifting the competitive dynamic from a "blue ocean" to a "red sea." This makes it difficult for suppliers like Inovance to protect margins, especially on domestic sales, which account for 82% of its revenue. The company’s overseas business boasts a much healthier 52% gross margin, but its smaller scale cannot yet offset the pressure at home.
The 106.5 billion yuan valuation of Inovance now faces significant scrutiny. While a consensus of 10 analysts forecasts a full-year 2026 net profit of 1.1 billion yuan, achieving this target requires a sharp and immediate reversal of first-quarter trends. The stock's performance will serve as a key indicator for whether the AI supply chain can profitably manage the costs of the current buildout, with investors also watching competitors like Vertiv and CoolIT closely.
This article is for informational purposes only and does not constitute investment advice.
