Semiconductors: DRAM prices on the rise Event  InSpectrum reported 1H April DRAM contract prices: 2Gbit and 1Gbit DDR3 DRAM single-device prices increased HoH by 1.8% and 3.2%, respectively, to US$1.94 and US$0.99. Current spot prices are above these at US$2.02 and US$1.18, respectively, and may point the way to further contract price increases. The 2GByte DDR3 DRAM module price rose 2.9% to US$17.80. Impact  Rising DRAM prices look set to continue in CY2Q: We expect the increase in DDR3 DRAM contract prices to accelerate in CY2Q, as rising demand and growing apprehension of shortage risks run up against tightening supply. Macquarie’s Daniel Kim sees a ~5% HoH contract price increase in 2H April.  300mm wafer shortages may bite by CY3Q: We believe industry-wide 300mm wafer inventories look sufficient to tide the DRAM sector over till at least the end of May. This should provide for sustained finished wafer outputs (and thus DRAM shipments) till July. But as Macquarie analyst Damian Thong wrote in his recent report Silicon wafer industry: Earthquake tremors to tighten market (29 March 2011 – [LINK]), there is a risk in June of a temporary ~15% (~0.5m units/mo) worldwide shortfall of 300mm wafer availability vs demand.  Impact on DRAM supply: The impact of 300mm wafer shortages may be particularly large on the DRAM industry – the largest user. The DRAM industry generates the lowest revenue/wafer compared to foundries or logic IDMs, which raises the difficulty of paying up for wafers unless DRAM prices rise in tandem. We note that the total potential shortfall in 300mm wafer availability in June may be equivalent to about a third of the DRAM industry's demand. Though the burden may be spread to other sectors, a big part of it could fall on DRAM producers.  DRAM prices to benefit: The good news for DRAM producers is that a fall in volume may be offset by price hikes. It is hard to gauge the impact of such a supply-side shock, but we note that after Qimonda's bankruptcy in late- January 2009, DRAM spot prices jumped ~40% over six months, and the DRAM ASP/bit in WSTS data (reflecting all DRAM shipments) rose ~29% between January and July.  Risks for Elpida: Macquarie's Damian Thong believes that while all DRAM producers will see risks to wafer supply to some degree, Elpida may face higher risk. Elpida is the most reliant on Shin-Etsu, which may have ~65% of its 300mm ingot production halted due to the stoppage at Shirakawa. Elpida may be disadvantaged compared to Samsung and Hynix, which could have better access to wafers due to their stronger DRAM market position and support from Wacker (Siltronic) and LG (Siltron). Inotera and Nanya may also have a stable wafer source in Formosa SUMCO. Because of Elpida's high exposure to mobile DRAM, and its likely prioritisation of mobile DRAM over PC DRAM if it cannot source enough wafers (due to commitments to key customers like Apple), it may benefit less from surges in commodity PC DRAM pricing. Outlook  DDR3 DRAM prices have bottomed and are now starting to rise. We expect this trend to gain steam. We view Inotera, Hynix and Samsung as beneficiaries. While we are more cautious on Elpida, it is possible that at the current valuation (~1x P/NAV vs ~2x for Hynix) risks to volumes may be already discounted into the share price – the shares have underperformed Hynix’s by >20% since 11 March.

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Semiconductors: DRAM prices on the rise
Event
 InSpectrum reported 1H April DRAM contract prices: 2Gbit and 1Gbit DDR3
DRAM single-device prices increased HoH by 1.8% and 3.2%, respectively, to
US$1.94 and US$0.99. Current spot prices are above these at US$2.02 and
US$1.18, respectively, and may point the way to further contract price
increases. The 2GByte DDR3 DRAM module price rose 2.9% to US$17.80.

Impact
 Rising DRAM prices look set to continue in CY2Q: We expect the increase
in DDR3 DRAM contract prices to accelerate in CY2Q, as rising demand and
growing apprehension of shortage risks run up against tightening supply.
Macquarie’s Daniel Kim sees a ~5% HoH contract price increase in 2H April.
 300mm wafer shortages may bite by CY3Q: We believe industry-wide
300mm wafer inventories look sufficient to tide the DRAM sector over till at
least the end of May. This should provide for sustained finished wafer outputs
(and thus DRAM shipments) till July. But as Macquarie analyst Damian Thong
wrote in his recent report Silicon wafer industry: Earthquake tremors to tighten
market (29 March 2011 – [LINK]), there is a risk in June of a temporary ~15%
(~0.5m units/mo) worldwide shortfall of 300mm wafer availability vs demand.
 Impact on DRAM supply: The impact of 300mm wafer shortages may be
particularly large on the DRAM industry – the largest user. The DRAM
industry generates the lowest revenue/wafer compared to foundries or logic
IDMs, which raises the difficulty of paying up for wafers unless DRAM prices
rise in tandem. We note that the total potential shortfall in 300mm wafer
availability in June may be equivalent to about a third of the DRAM industry's
demand. Though the burden may be spread to other sectors, a big part of it
could fall on DRAM producers.
 DRAM prices to benefit: The good news for DRAM producers is that a fall in
volume may be offset by price hikes. It is hard to gauge the impact of such a
supply-side shock, but we note that after Qimonda's bankruptcy in late-
January 2009, DRAM spot prices jumped ~40% over six months, and the
DRAM ASP/bit in WSTS data (reflecting all DRAM shipments) rose ~29%
between January and July.
 Risks for Elpida: Macquarie's Damian Thong believes that while all DRAM
producers will see risks to wafer supply to some degree, Elpida may face higher
risk. Elpida is the most reliant on Shin-Etsu, which may have ~65% of its
300mm ingot production halted due to the stoppage at Shirakawa. Elpida may
be disadvantaged compared to Samsung and Hynix, which could have better
access to wafers due to their stronger DRAM market position and support from
Wacker (Siltronic) and LG (Siltron). Inotera and Nanya may also have a stable
wafer source in Formosa SUMCO. Because of Elpida's high exposure to mobile
DRAM, and its likely prioritisation of mobile DRAM over PC DRAM if it cannot
source enough wafers (due to commitments to key customers like Apple), it
may benefit less from surges in commodity PC DRAM pricing.
Outlook
 DDR3 DRAM prices have bottomed and are now starting to rise. We expect
this trend to gain steam. We view Inotera, Hynix and Samsung as
beneficiaries. While we are more cautious on Elpida, it is possible that at the
current valuation (~1x P/NAV vs ~2x for Hynix) risks to volumes may be
already discounted into the share price – the shares have underperformed
Hynix’s by >20% since 11 March.