Semiconductors: Apple is NAND’s best friend ::Macquarie Research,

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Semiconductors: Apple is NAND’s best friend
Event
 We believe Apple's success with its iOS devices and MacBook Air is benefitting
the NAND flash industry. We believe Apple may make >US$1/GB of profit in
effectively reselling NAND flash – possibly four times Toshiba’s gross profit in
NAND flash. If correct, then ~8% of Apple’s gross profit may be from NAND
flash alone, and this portion may be >60% more than Sandisk’s gross profit.
Impact
 We estimate that Apple accounted for 20-25% of the world's NAND flash
consumption in CY2Q, based on its product sales. This is high. In CY2010,
even the top PC vendor (HP) accounted for less than 20% of the world’s PC
microprocessor consumption. We estimate that at least 40% of Toshiba’s
NAND flash bits go to Apple. Apple is the largest OEM buyer of chips overall.
 NAND flash bit consumption growth via Apple products surged 100% YoY
in the June quarter: This compared to "only" a ~45% increase outside Apple’s
products. We believe Apple promotes NAND flash consumption by users more
effectively than other firms including vendors of say USB drives.
 Apple may be the world's most effective reseller of NAND flash. Apple is
able to design products that harness the full potential of NAND flash storage by
delivering superior consumer value. Thus Apple is able to drive robust NAND
flash consumption growth without sole dependence on pricing. Even more
importantly, Apple can capture a large chunk of that consumer value as profit,
which it shares with its suppliers. This is a win-win situation, in our view.
 We believe Apple may in fact make more profit from NAND flash than its
suppliers do. Apple buys NAND flash at prices that give ~20% OP margins to
Toshiba and Samsung – then resells them in products that deliver even higher
margins for itself. In the case of the MacBook Air, we believe the marginal profit
ratio for Apple, when consumers select large capacity SSDs vs the lowest
specification (64GB in the 11" version), may be as high as 45-50%. Apple’s iOS
products do not provide a memory card slot, so consumers are effectively
prodded to buy built-in storage only from Apple at a relatively high price, upfront.
 We do not think Apple's iCloud will suppress NAND flash demand in the
medium-term, until availability of fast connectivity allows fast downloads or
streaming while on the move. Instead, by allowing users to easily replicate
content across multiple Apple products, we believe this will lead to an increase
in total storage demand. Given the margins Apple receives on reselling NAND
flash / SSDs, this strategy clearly makes sense. We think it is interesting that
Apple’s iCloud pricing (US$20 for 10GB per year) is as pricey as SSD storage.
Outlook
 We are positive on the outlook for the NAND flash businesses of Toshiba
(6502 JP, ¥394, Outperform, TP: ¥500, Damian Thong) and Samsung
Electronics (005930 KS, Won852,000, Outperform, TP: Won1,200,000, Daniel
Kim). We believe the next catalyst for Toshiba in particular may be a substantial
QoQ surge in its sales of NAND flash in the September quarter as it ships
volumes to support Apple’s ramp-up of new iPhones and iPads. Macquarie’s
technology team believes that Apple’s iPhone production could surge form 25m
units in CY3Q to 35-45m in CY4Q. We believe Apple’s NAND flash bit demand
from Toshiba’s standpoint may increase ~60% HoH in CY2H.