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Taiwan DRAM Sector
DRAM drama: plot twists and
high stake negotiations
Matt Cleary
Research Analyst
(886) 2 2192 2838
matt.cleary@db.com
Takeo Miyamoto
Research Analyst
(81) 3 5156 6726
takeo.miyamoto@db.com
Derrick Yang
Research Assistant
(886) 2 2192 2847
derrick.yang@db.com
Downgrading Powerchip to Hold; maintaining Buy on NYT and Inotera
The Taiwan government will soon select which companies will lead its DRAM
consolidation efforts. Meanwhile, we are becoming slightly more selective in our
DRAM sector picks, both in response to the group's recent gains and due to
Elpida's recent overtures to the Japanese government. We narrow our loss
estimates for all our DRAM names on the prospect of better pricing. Although we
lowered our rating on Powerchip from Buy to Hold, we reiterate our Buy ratings on
Nanya Tech and Inotera. ProMOS remains a Sell.
Deutsche Bank AG/Hong Kong
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Forecast change
Top picks
Nanya Technology Corp (2408.TW),TWD6.75 Buy
Inotera Memories (3474.TW),TWD13.90 Buy
Companies featured
Nanya Technology Corp (2408.TW),TWD6.75 Buy
2007A 2008E 2009E
P/E (x) – – –
EV/EBITDA (x) – – 19.6
Price/book (x) 1.3 1.1 1.8
Inotera Memories (3474.TW),TWD13.90 Buy
2007A 2008E 2009E
P/E (x) 122.3 – –
EV/EBITDA (x) 4.8 3.6 2.1
Price/book (x) 1.2 0.9 1.1
Powerchip (5346.TWO),TWD3.87 Hold
2007A 2008E 2009E
P/E (x) – – –
EV/EBITDA (x) 8.7 – 15.6
Price/book (x) 1.0 0.5 0.7
ProMOS (5387.TWO),TWD1.60 Sell
2007A 2008E 2009E
P/E (x) – – –
EV/EBITDA (x) 11.2 – 34.0
Price/book (x) 0.8 0.2 0.6
Global Markets Research Company
Bankruptcy, spiking prices and possibly shifting alliances
Plot twists have been coming fast and furious in recent weeks, starting with the
insolvency filing of Qimonda. DRAM prices reacted by jumping further in the spot
market, and have roughly doubled from their November lows. Although underlying
demand remains soft, DRAM output continues to decline at the margin and should
retreat further as Qimonda’s US fab winds down production. ProMOS could be
next as its ECB put date approaches. As the Taiwan government has made it clear
that they have no intention of saving ProMOS, the company’s hopes rest on
getting bond holders to accept partial payment.
Elpida’s moves complicate Taiwan consolidation efforts
Following the rejection of two of its consolidation proposals to the Taiwan
government, Elpida announced that it will seek assistance from the Japanese
government under legislation that has yet to pass the Diet. With Taiwan’s DRAM
consolidation plans due in the coming weeks, Elpida’s move makes an Elpida-led
alliance doubtful. This will certainly complicate Powerchip’s recovery plans and
increase the company’s risk profile. Given this higher risk potential and the share’s
nearly 19% out-performance since our upgrade in November, we have
downgraded our rating on Powerchip from Buy to Hold.
Thesis remains intact – the Micron alliance will take the lead
The insolvency of Qimonda, the subsequent surge in DRAM pricing and the lack of
any government intervention to save ProMOS all support our positive thesis on
DRAM. We continue to believe that 2Q09 will be the best quarter of the year, and
are looking to a more sustained recovery in 2010. Elpida’s diversionary overtures
to the Japanese government will scuttle any hopes of technology sharing and
undermine any chance that the company will be chosen to lead one of Taiwan’s
coalitions. This will give the Micron alliance the inside track in Taiwan’s muchanticipated
DRAM consolidation. Thus Nanya Tech and Inotera are our top picks.
Valuations undemanding by EV-sales metric
Despite their recent gains, our favored names Nanya Tech and Inotera remain
attractively valued on our preferred down-cycle metric of forward EV-to-sales.
Risks to our positive thesis on these two names include potential execution missteps
on the move to Micron’s process, as well as the possibility of renewed
oversupply in 2H09. Upside risks both to our neutral rating on Powerchip and our
negative thesis on ProMOS include better-than-expected DRAM pricing and easier
debt refunding than we currently expect. The chief downside risk for Powerchip is
the possibility of being pressured to join the Micron camp. See company sections.
Table of Contents
DRAM drama...................................................................................... 3
Taiwan DRAM sector update....................................................................................................3
The latest plot twists.................................................................................................................3
The Elpida dossier.....................................................................................................................4
The Qimonda dossier................................................................................................................5
The Micron dossier ...................................................................................................................6
Taiwan gets ready to bet its chips ............................................................................................6
Taiwan’s move: Is it time to double down? ..............................................................................9
How to play it..........................................................................................................................11
Valuation ................................................................................................................................13
Risks ......................................................................................................................................13
Nanya Technology Corp.................................................................. 14
Inotera Memories ............................................................................ 18
Powerchip ........................................................................................ 22
ProMOS ............................................................................................ 26
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