Mini-correction in DRAM price :: Macquarie Research

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Mini-correction in DRAM price
Event
 We are amending our DRAM sector view from a modest price recovery (+15%)
in PC commodity DRAM to a moderate price fall (-20%) during 2H11.
Impact
 The mini rally ended in June, after prices bottomed in February. Our
earlier estimate of bottoming PC DRAM prices in 1Q11 was accurate, driven
by inventory restocking on the heels of the Japan earthquake and rock-bottom
DRAM prices. DDR3 2GB module contract price was up 13% from the
February low. And then, however, PC DRAM price has reversed its upward
price trend from June.
 Inventory seems high at both PC OEMs (over 6 weeks) and channel (3-4
weeks). inSpectrum estimates PC OEMs, which needed over 6 weeks to
digest inventory at end-June, will move to a more normal 3-4 weeks over the
summer. Channel inventory needs to be normalised by a couple of weeks.
Given the muted seasonality in PC demand and stalled content growth, the
industry is realising that it has overbuilt inventory. Thus, we believe PC
commodity DRAM price is likely to fall 20% to US$0.8/Gb before the year-end.
 This is not a crash, but a mini correction. The magnitude of DRAM price
erosion should be mild, likely within the range of normal annual cost reduction
(circa 30%) from chip miniaturisation. This suggests that overall industry
profitability is unlikely to worsen from the current low level, as long as the
promised tech migration is underway. So, this should not be considered a
crash similar to the one we saw during 2H10, after a long and strong rally
from US$1.0/Gb in April 2009 to US$3.0/Gb in April 2010.
 DRAM content growth seems delayed to 2012, if not structurally over.
DRAM cost stands at only US$30 for 4GB, or 5% of PC BOM cost, which is at
the lower-end of the historical trend. But, PC companies are hesitant to
upgrade DRAM density due to a lack of confidence on the PC market.
Meanwhile, Microsoft’s OS has become more DRAM efficient. Several new
notebook platforms, including Apple’s Macbook Air, Google’s Chrome-book,
and Intel’s Ultra-slim notebook, do not require high DRAM density (only 2GB).
This is a long-term threat to DRAM industry, in our view.
 We can’t overemphasise the growing importance of specialty DRAM. In
our projection, mobile and server should account for 26% and 18% of total
DRAM bit in 2012, up from 10% and 12%, respectively, in 2010. In a stark
contrast with PC DRAM, specialty DRAM should register substantial growth in
content over the next three years. That is, the DRAM industry is becoming
increasingly less dependent upon the conventional PC market.
Outlook
 We maintain our bullish view on Samsung Electronics (SEC) and Hynix
for their cost leadership and heavy exposure to specialty DRAM. But, we
cut our semiconductor earnings estimates for SEC and Hynix by over 30%.
Elpida Memory remains in our Marquee Buy List, given the growing
proportion of mobile DRAM in its mix. However, we are lowering our rating
on Inotera Memories by one notch to Neutral due to its heavy dependency
on PC commodity DRAM.