CITIC SEC: The storage industry remains highly prosperous, with subsequent attention on LTA progress and shareholder returns.

CITIC SEC has released a research report stating that the price adjustments of major global storage companies in June and July were not due to weak performance, but rather a concentrated release of market concerns following peak price increase rates. Overall, the Q2 performance of the relevant companies met expectations, and products are still in a price increase cycle, with AI-driven data center revenue share continuing to rise. Looking ahead, although the rate of price increases for storage products is slowing, considering that the storage industry will still be in a state of supply-demand imbalance by 2027, this will effectively support the gross margins and profitability of companies in the industry chain. Furthermore, regarding the market's greatest concern, LTA, it can be observed that relevant companies are currently securing large customer demand with 3-5 year LTAs, and the flexible pricing mechanism along with price floors is expected to reduce profit volatility and enhance valuations. It is recommended to pay attention to the HDD, DRAM, and NAND sectors. Revenue continues to maintain strong growth, primarily driven by ASP. 1) For Q2, the overall revenue growth rate of the relevant companies reached between 12%-76% quarter-on-quarter, with revenue growth of NAND-related companies significantly higher than that of DRAM companies, and secondly higher than HDD companies. 2) The quarter-on-quarter revenue growth is mainly driven by ASP price increases. Overall, although the storage prices saw a slowdown in growth in Q2 2026, there was still considerable quarter-on-quarter growth. Among them, DRAM increased by over 30%-45% quarter-on-quarter, NAND increased by over 50%, and HDD increased in the high single-digit range. Revenue structure: The share of data center revenue is steadily increasing. From the financial data of the second quarter, the revenue share of each company in the data center field continues to rise: 1) Micron's DRAM and NAND revenue share in the data center field reached 61% in CY26Q1, while the consumer segment's revenue share decreased to 28%. 2) SK Hynix's DRAM (HBM and traditional server DRAM) revenue share in the data center field is about 70%, with the mobile and consumer segments dropping to around 20%. 3) Flash companies focusing on NAND, such as SanDisk and Kioxia, saw their data center revenue shares rise to 33% and 41%, respectively, in CY26Q2. 4) In the HDD sector, Western Digital and Seagate maintained a stable data center revenue share between 80%-90% in CY26Q2. Long-term contracts: Ongoing cooperation with CSPs reflects high industry prosperity. 1) Driven by AI/data center demand, major storage manufacturers are securing capacity through 3-5 year LTAs, with the proportion of locked long-term contract capacity generally exceeding 50% (e.g., SanDisk, Samsung, Kioxia). In terms of the pricing mechanism for long-term contracts, most manufacturers adopt a flexible pricing strategy, differentiating prices based on customer situations and product price variations. Some companies set a minimum price to guarantee subsequent profitability. From the status of long-term contract signing, these contracts primarily involve data center CSP companies, reflecting a rising demand driven by AI/data centers. 2) Assessment of industry prosperity: Overall, the consensus among seven companies is high the storage industry will experience a tight supply-demand situation, with even a widening gap over the next 1-2 years (DRAM/NAND until 2027, HBM until 2028 and beyond), and the shortage of AI-related categories like HBM may last even longer.