SanDisk: Risk Of NAND Supply Increase Threatens Asian DRAM Stocks

Merrill Lynch’s Sidney Ho Tuesday morning downgraded shares of SanDisk (SNDK) to Neutral from Buy, citing “the risk of supply increase in the second half of the year dampening the potential cost structure improvement” at the company.

Ho maintained his below-consensus non-GAAP EPS estimates of $1 this year and $1.90 next year; the Street sees $1.13 this year and $2.15 next year.

Ho says second half demand appears in line with expectations, but that he is “increasingly cautious on the supply side of the equation, especially the large discrepancy between DRAM and NAND margins.” He sees Korean chipmakers shifting capacity from DRAM to NAND if weak DRAM pricing continues., “Compound that with better-than-expected yields by NAND producers, [and] we believe the overall industry bit growth for 2007 will exceed what NAND producers currently indicate.”

Merrill Tuesday also downgraded its ratings on most Asian DRAM stocks. Samsung, Hynix and Powerchip were downgraded to Neutral from Buy; Nanya goes to Sell from Neutral; ProMOS goes to Sell from Buy. “We acknowledge that DRAM pricing has declined rapidly and could bounce bank in the near term,” wrote Merrill’s Seoul-based chip analyst Simon Dong-je Woo.

However, our bottom-up analysis indicates that there has been no slowdown in the spending commitments from DRAM suppliers. In the absence of a large deceleration in capex, we think memory prices cannot achieve a sustained recovery.

The gloomy view is spilling over to the U.S.-listed DRAM stocks. Micron (MU) Tuesday was down 13 cents at $11.32; Qimonda (QI) was down 34 cents at $14.26.

SNDK vs. QI vs. MU 1-yr chart: