Macquarie Research, Semiconductors: DRAM contract price takes a dip in 1H June

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Semiconductors: DRAM contract price takes
a dip in 1H June
Event
 As reported by InSpectrum today, PC DRAM contract prices are correcting
down slightly in 1H, following the lacklustre DRAM spot price trend.
Impact
 The DDR3-1333 2Gbit single-device contract price is down 3% HoH on
average to US$2.06, while the 1Gbit device is down 5.4% to US$1.00. The
2Gbyte DDR3-1333 module contract price is down 4.8% to US$18. This
correction reflects the reality of the lacklustre PC production volumes in CY2Q.
Pricing had been supported early in the quarter by post-Japan earthquake
hoarding, but with inventories at PC OEMs and module makers relatively high
(~6 weeks), demand has tailed off, leading to a weaker pricing environment.
 Not a surprise, but not a positive catalyst either, in the immediate term:
As we have noted recently, this DRAM contract price decline – the first since
the trend bottomed at the start of the year – has been well anticipated by
comments made by the managements of DRAM firms. It should not come as
a surprise to the market. However, it is weaker than we had previously
assumed – we had anticipated a flattish price trend during June-August.
 Pricing weakness may persist into July. Until PC production volumes pick
up, the focus of the supply-chain may be to keep inventories down. This could
result in a further decline in the contract price in 2H June. Currently, the
DRAM players do not seem particularly optimistic on July, and the default
view seems to be of a recovery that is delayed into August. DRAM producers
will be counting on the typical seasonal build for “back-to-school”. We believe
this will occur, though there are still headwinds, eg, in lacklustre demand
conditions in Europe. Macquarie analyst Andrew Chang estimates 7–8% QoQ
growth at the top-tier notebook PC ODMs in CY3Q, based on recent checks.
 The uncertainty on pricing will dampen earnings expectations in the
very near term. That said, we are comfortable with the DRAM profit
estimates across our coverage set. Damian Thong, for instance, believes that
while there is some downside risk to his Elpida revenue estimates, the profit
forecasts will be attainable due to the company’s cost reduction efforts.
Outlook
 Across the region we have Outperforms on Hynix and Samsung in Korea,
Elpida Memory in Japan and Inotera in Taiwan. Hynix has perhaps the best
set of attributes (a well-balanced DRAM portfolio with strength in non-PC
DRAM, plus an emerging NAND flash growth driver), while Elpida may have
the most compelling valuation (the shares are trading at <0.7x FY3/12 NAV
and a PER of 10x FY3/12E despite the strong growth in mobile DRAM and
profit recovery) and the stock has underperformed. Meanwhile, Inotera has
already underperformed all of the above over the past three months.
 While we are generally positive on the semiconductor sector, the DRAM
sector does seem unattractive for at least the next month. We continue to
favour the NAND flash sector (Toshiba and Samsung), but in terms of visibility
into sequential growth momentum, perhaps the outsource test and assembly
firms and TSMC may be the most compelling. Michael Liu has recently made
the case again in his reports for TSMC (9 June 2011) and ASE (9 June 2011).