Memory sector:July memory price tracking ahead;set to rise f
Strong July memory price announced: DRAMeXchange reported July and 3Qmemory price; PC and NAND prices were slightly ahead of expectation, while mobileand server DRAM prices were in line.(1) PC DRAM prices rose 5% q-o-q (versus ourforecast of 3%) while mobile DRAM prices rose 2% q-o-q due to inventory build-updemand before the IT peak season and capacity conversion to server. (2) Serverprices rose 2% m-o-m due to strong data centre demand.(3) NAND prices rose 2-7%(versus our 2% q-o-q) due to 2D capacity decrease and peak season demand.Server driven memory price hike to persist. We expect further capacity allocation toserver from mobile and PC, amid robust server demand, to continue to drive DRAMprices upward (see Broader server impact on DRAM ASP and earnings, June 28).We estimate server and PC DRAM prices rise 9% q-o-q and 4% q-o-q in 4Qe (9%q-o-q and 6% q-o-q in 3Qe), respectively. Firm server demand, coming mainly fromthe expansion of cloud services for artificial intelligence (AI) applications and CPUupgrades, is leading this change in capacity allocation. We assume server portion ofDRAM demand expands to 40% by end-2018e from 26% in 2016, as it outpaces themarket with 46% y-o-y bit demand growth (22% y-o-y for the industry in 2017).
Better 2Q preliminary results. Samsung released strong sales and operating profit(OP) figures at KRW60trn (+19% q-o-q, +18% y-o-y) and KRW14trn (+41% q-o-q,+7% y-o-y, 8% above consensus), respectively. This resulted from 1) higher memoryASP and NAND margin profile, 2) greater impact from rising flexible OLED shipmentsin the display division, and 3) surging seasonal demand for home appliances.
Mobile DRAM price turning stronger in 4Qe. Mobile DRAM prices should show astronger trend in 4Q, rising 7% q-o-q, on
However, smartphone earnings appeared to be weaker than our expectation due tohigher marketing costs and slightly weaker GS8 shipments amid smartphonecommoditization. As we highlighted in our memory report Broader server impact onDRAM ASP and earnings (28 June), the rising server DRAM portion has a greaterimpact on ASP and margin as its premium over mobile and PC is expanding. Also,product mix improvement through robust flexible OLED shipments for GS8, as wellas strong LCD TV panel prices, seem to have led to a better earnings profile fordisplay. Consolidation of Harman’s earnings also boosted earnings.
(1) seasonal strength in demand amid abusy period for product launches and(2) memory makers’ intentions to narrow theprice gap between server and mobile. Due to a price hike in server DRAM, the mobileDRAM price discount to server DRAM widened to 23% in July versus 3% in January,but there is no reason for this discount given continuing DRAM shortage. A recoveryin smartphone shipments in 3Q/4Q by 10%/14% q-o-q and 1%/4% y-o-y, accordingto DRAMeXchange, should also support a stronger mobile DRAM price trend in 4Q.
Component-driven growth to persist. We estimate 3Q OP will reach anotherhistorical high at KRW15.2trn (+9% q-o-q, +193% y-o-y), attributable to 1) continuingmemory price hikes and margin improvement and 2) positive impact from risingflexible OLED contribution as it starts to massively ship out to external customers,reaching 40% of total by end-2017e from mid-10% in 2016. We estimate DRAM ASPwill increase 4% q-o-q as aggressive data centre investment boosts server demand,and this will lead margins to reach 62% in 3Qe from 60% in 2Q. Also, NAND marginimprovement should continue as 64 layer upgrades will support further costreduction. Meanwhile, we cut smartphone ASP assumptions and earnings as welower our GS8 shipment assumption for 2017e to 45m units (from 50m) factoring inweaker demand from China. We think a lower priced Note FE launch and earlier Note8 production will partially offset such weakness.
Reiterate Buy on memory makers and NAND equipment maker: Samsung, andHynix and Wonik IPS. Samsung and Hynix are key beneficiaries and should showsteep earnings increases on the back of such a strong price trend. With ROE rising,we view both Samsung and SK Hynix’s valuations as attractive. Samsung trades at6.6x 2018e PE and 1.2x 2018e PB with an ROE of 20%, while SK Hynix trades at1.1x 2018e PB with an ROE of 28%. With a further capex increase for 3D NAND, weexpect Wonik IPS to be another beneficiary.
Reiterate Buy and TP of KRW2.8m. We raise our OP estimates by 4% for 2017e/18e,given the greater impact from rising server contribution and better OLED and LCDmargins. Our target price is based on a 1.5x PB multiple applied to 12-months forwardBVPS (unchanged 3Q17-2Q18e). We think the valuation is still attractive as we see ROErising to 20% in 2017e, but the shares are trading at only 1.3x 2018e book value and 6.8x2018e PE. Our target price implies 16.5% upside. The key downside risk is further intensecompetition from mobile companies and China NAND makers.
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