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Semiconductors: DRAM Price Decline, A Precursor To Stock Re-Rating

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Includes: HXSCL, SSNLF
by: Hyundai Motor Investment & Securities
Hyundai Motor Investment & Securities
Long/short equity, Deep Value, growth at reasonable price, Korea
Summary

Despite worries that DRAM prices have peaked, modest price declines to boost market by stimulating demand.

VR video consumes 15x more memory vs. 2D video; need to focus more on the potential of 5G and AI.

5G to shift industry paradigm from DT to RT, ushering in the second big cycle for memory semiconductors.

The low valuations of Samsung Electronics and SK Hynix are proof that shares have priced in DRAM price concerns.

DRAM price concerns priced into memory semiconductor shares

Chipmakers are suffering from severe corrections due to concerns that DRAM prices may have peaked. These lingering concerns, which began last year, are unlikely to materialize at least until 3Q18. Some worry that the closing gap between PC DRAM spot prices and contract prices will lead to the fall of PC DRAM contract prices. However, the prices of mobile and server DRAM should maintain until 3Q18 because of robust demand. We expect DRAM prices to fall in 1H19 when demand is seasonally low. Even so, the decrease should be limited to 5% given the strengthening AR functions and growing number of cameras in smartphones as well as burgeoning demand from data centers. Also, in 2H19 when silicon wafer capacity is slated to increase 7% from the current level, DRAM prices should be able to find a firmer footing. Samsung Electronics (OTC:SSNLF) is working to boost the DRAM capacity of its Line 17 and Pyeongtaek fab but considering the capacity loss caused by Line 11’s conversion into a CMOS facility and the loss of yield stemming from the production of 1Y nano DRAM, Samsung’s DRAM capacity increase will be just enough to retain its DRAM leadership. Of course, mobile memory chip prices have to fall to a certain extent because the BOM cost ratio of high-end smartphones with 6GB LPDDR4x and UFS 256GB has climbed to 31% despite weak smartphone demand. This explains the recent drop of TLC wafer prices. However, even if UFS prices decrease, the bigger price premium of UFS over eMMC means chipmakers can halt price declines by raising the portion of UFS in their product mixes.

Trading approach until 1H19, buy and hold from 2H19

When 5G services become available in 2020, the current AI service will fuse with hyper-connected technology, shifting the industry paradigm from data technology (NYSE:DT) to robotic technology (RT). Memory chip demand, mostly led by data centers currently, will be fueled by consumer electronics as well, resulting in excessive demand across the industry. Indeed, AR/VR- enabled video which is most likely to become a killer application in the 5G era requires 15 times more storage capacity compared to full HD content in 2D. Considering the expandability and vast upside potential of demand, chipmakers’ capex is not at all aggressive, in terms of both speed and scale. As such, we believe the memory semiconductor industry will experience the second big cycle from 2020. The last noise from the memory semiconductor sector will probably be DRAM prices that still do not fall, and even if they do fall, DRAM shares are still expected to re-rate as uncertainties dissipate. Of course, it is possible that DRAM makers will experience further corrections if DRAM contract prices come down; but it is also possible that shares will sharply rebound, if valuations become more attractive and DRAM price declines turn out to be milder than expected. Having said that, there is no need to become overly excited because if Korean chipmakers report record earnings in 3Q18, it may be soon followed by one-off cost hikes in 4Q18 and weak seasonality in 1H19. As such, we recommend a box trading strategy for the two Korean memory semiconductor names until 1H19, and a buy-and-hold strategy from 2H19.

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