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Asia ex. Japan Memory Sector
SECTOR REVIEW
FY09 outlook remains cloudy
■ The actions taken by memory suppliers to manage the growth of supply
has raised expectations that supply and demand will be better balanced
in FY09E. This impact is overstated, we believe, due to competition by
non-Samsung players to become second in DRAM market and
Samsung’s strategy of taking advantage of its competitors’ capacity
declines, while economic conditions cloud the demand outlook. We
believe investors should focus on the winner, Samsung, rather than
trying to time the next recovery.
■ We believe the DRAM market will decline 19% to US$20 bn in FY09E,
with a 42% YoY price fall. Supply growth of 39% should offset demand
growth of 39%, thereby maintaining the inventory hangover. Downside
of 5% to global supply based on our estimates, could result in a DRAM
industry supply shortage in 2H09E. Even so, competition to be second
and Samsung's new line ramp-up can back up any shortage in supply.
■ The change in the NAND market is more dramatic with a market share
loss by Hynix. We expect 19% potential downside to the market to U$10
bn with a 55% price fall YoY. We believe supply growth of 75% will be
below demand growth of 80% with solid state disk growing to 9% of
demand in 4Q09E, but this would not be enough to turn the cycle.
■ Valuations are near historical lows and may be pricing in many
negatives. However, consensus earnings are well above our estimates.
We maintain our MARKET WEIGHT on the sector. By stock, we maintain
an OUTPERFORM on Samsung and NEUTRAL on Hynix. We downgrade
Powerchip, Nanya, Inotera and Promos to UNDERPERFORM from
Neutral. While the long-term outlook for the memory industry is still
intact, we would look for re-entry points arising from restructuring
events in the industry over the next 12 months.
FY09E outlook remains cloudy
Several actions taken by memory suppliers to manage supply growth, including the
shutdown of 200mm fabs and the pushing out of new 300mm fabs, have raised
expectations that supply and demand in the memory market should be better balanced in
FY09E. While many suppliers are expected to suffer from low-volume growth, due to
substantial financial stress, this impact is overstated, in our view. We believe competition
to become number two in the DRAM industry, a strategy by Samsung to take advantage of
capacity decline at Hynix for NAND or any meaningful DRAM consolidations are likely to
hold supply growth, while economic conditions and the outlook dictate and cloud the
demand outlook. We believe investors should focus on the sole winner, Samsung, for a
while, rather than trying to time the next recovery. This report examines the memory
market’s outlook, and analyses supply and demand of the DRAM and NAND markets. Our
conclusions are as follows:
DRAM supply and demand in FY09E
We believe the DRAM market will decline 19% to U$20 bn in FY09E, back to the levels of
FY03 after three consecutive years of downside, with a 42% YoY price decline. Expected
supply growth of 39% and 39% demand growth are likely to maintain capacity and the
inventory hangover. Downside of 5% to global supply from our estimates could reduce the
supply shortage in 2H09E, which would require at least an 8% cut in supply from the non-
Samsung camp. In such a case, we believe the competition to be number two by Hynix,
Elpida and Micron through productivity gains (process, 6F^2 and 300mm), as well as
Samsung's new line ramp-up, could support this supply shortage. The liquidity situation of
suppliers in Taiwan suggests structural restructuring is necessary for shareholder returns
although Taiwan is likely to remain a low-cost and efficient memory manufacturing base.
NAND supply and demand in FY09E
The change in supply and demand of NAND is more dynamic than DRAM, but it still faces
lacklustre consumer demand with Hynix suffered market share falls from 21% in 4Q07 to
6% in 4Q08E. We expect 19% potential downside to the NAND market to U$10 bn, back
to FY05 levels, with 75% supply and 80% demand growth. Solid state drive is expected to
grow from 4% in 4Q08E to 9% in 4Q09E of total bit shipments. However, this would not be
enough to offset muted growth in typical low-density items, such as digital still cameras,
MP3 and USB. We expect card consumption, as well as density upgrades in mobile
handsets, to also slow. In terms of supply, in our view, Samsung will start leveraging on
Hynix’s capacity decline, while productivity gains of 3 bits per cell and yield gains in 40nmx
are likely to suggest supply upside risk.
Financial crisis and views
Valuations are near historical lows and may be pricing in many negatives. However,
consensus earnings are well above our estimates and the financial outlook is still cloudy.
We maintain our MARKET WEIGHT on the sector. By stock, we maintain an
OUTPERFORM on Samsung and NEUTRAL on Hynix. However, we downgrade
Powerchip, Nanya, Inotera and Promos to UNDERPERFORM from Neutral with lower
target prices. Amid the volatile market, our target prices could be too conservative in the
short term; however, we expect stocks facing financial stress will find it difficult to
outperform in this macro environment. While the long-term outlook on the memory industry
is still intact, we would look for re-entry points arising from restructuring events in the
industry over the next 12 months.
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