Quick Summary of Key Points
The surge in storage chip prices driven by AI has lifted 12 A-share listed companies in the storage sector from a combined loss of 500 million yuan in the first half of last year to a staggering profit of 117.2 billion yuan in the first half of this year, turning the entire industry from loss to profit in just one year. However, despite the apparent overall increase in prices, the profitability of different segments of the supply chain varies by up to 70 percentage points. Midstream module companies have almost used all their cash flow to stockpile inventory, betting on further price increases. The secondary market has already seen a wave of speculation, and now there is a strong wait-and-see attitude. The performance growth in the third-quarter reports will directly determine the future trend of the sector.
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A Layman's Explanation of 5 Key Aspects
1. The Industry's Profit Surge from Loss to Billionaire-Level Earnings
The sudden wealth of the storage industry is not accidental; it's the result of three favorable factors coinciding:
- Price Cycle: Storage chip prices have been falling for nearly two years and entered an upward trend at the end of 2024. The demand for HBM high-bandwidth storage used in AI training and AI servers, as well as enterprise-level solid-state drives, has exploded. Overseas giants like Samsung and SK Hynix have shifted their production capacity towards high-end storage for AI applications, leaving the market short of supply. Institutions estimate that the supply-demand gap for storage will be negative by 1%-2% in 2026 and will widen further in 2027, driving prices up.
- Domestic Substitution: Domestic leaders in the storage industry, such as ChangXin Technology, have gained a significant share of the global DRAM market, now accounting for 8% and surpassing South Korean manufacturers. Their products are selling for higher prices and in larger volumes, leading to substantial profit increases.
- Low Baseline from Last Year: Last year, the industry was in a trough with a loss of 500 million yuan. This year, even a small increase in profits appears impressive, similar to going from a deficit of 5 yuan last month to a profit of 1172 yuan this month, which seems like a several-hundred-fold increase in revenue, but it's partly due to the previous losses.
2. Different Profitabilities in the Same Price-Increase Cycle
Companies in different parts of the supply chain have vastly different profitabilities, largely due to their business models:
- Winners: Original manufacturers that produce core storage chips, like ChangXin Technology, have the highest gross margins (84.74%), meaning they retain nearly 84% of their revenue as profit after covering costs. They benefit the most from the price increase.
- Midstream Players: These companies purchase raw chips from manufacturers and process them into USB drives, solid-state drives, and memory modules. Their margins have risen from around 5% to 45%-58% as chip prices increase.
- Suppliers: Companies that design storage control chips and related components have stable margins of 45%-68% due to technical expertise.
- Distributioners: These firms buy and sell chips, but their margins are low (11.61%) because they can only add a small amount to the prices without losing customers to direct buyers from manufacturers.
3. Hidden Risks in Inventory
The inventory of the 12 storage companies has increased by 76% compared to the beginning of the year, totaling over 119 billion yuan. This means that much of the profits hasn't gone into their pockets but has been used to buy more chips. Three leading module companies hold 55% of the total inventory, with a year-on-year increase of 120%-200%, resulting in a net outflow of over 16 billion yuan in cash. Only ChangXin Technology has positive operating cash flow, covering the inventory costs of the other 11 companies. While this strategy seems smart (higher prices mean future profits), it carries significant risks: if AI demand falls short of expectations or overseas manufacturers expand production too much, the inventory could depreciate, leading to substantial losses.
4. Stock Prices Despite Rising Profits
Stock prices have declined despite improving performance because A-share markets focus on future expectations rather than current facts. In May and June, markets anticipated strong storage performance and drove up prices, anticipating future profits. When actual results exceeded expectations, investors sold their shares. After August, funds shifted to more certain sectors like AI components, causing the storage sector to perform poorly, with only an average increase of 7.3%. Given the cyclical nature of the storage industry, investors are skeptical about sustained high profits.
5. The Future of the Storage Market
The key to predicting the market's direction lies in the third-quarter reports. The consensus is that the current high profits are partly due to a low base from last year. The "quarterly performance growth" will be the deciding factor:
- If third-quarter profits continue to rise, it indicates a persistent supply shortage and a longer price-increase cycle, giving the sector room for further growth.
- If profits decline, it suggests that the price increase has peaked, and the sector may experience a downturn.
In summary, the future of the storage market depends on the third-quarter reports, which will reveal whether the current high profits are sustainable.