Memory Chip Prices Likely to Turn around in 2H23
The authors are analysts of Shinhan Investment Corp. They can be reached at doyeon@shinhan.com and hyon@shinhan.com, respectively. – Ed.
Memory chip prices likely to drop until 2Q23 and turn around in 2H23
The memory chip market has witnessed the steepest decline in demand and the highest inventory levels in history. All memory makers except Samsung Electronics are expected to turn in losses in 4Q22, only two quarters after recording peak earnings in 2Q22. Memory shipments have remained stagnant in 4Q22. Inventory weeks on hand at the year-end should reach 10-12 weeks. With inventory levels remaining high at least through 1Q23, memory chip prices are likely to continue falling until 2Q23. An upturn is projected in 2H23 if inventories at client companies return to normal levels and macro conditions improve in 1H23. As inventories on the smartphone front are seen to be on a downtrend, we need to keep an eye out for improvement in macro conditions.
Supply cuts underway, caution against extremely negative interpretation
We believe the memory sector will not fall into a chicken game as feared by many market participants after 3Q22 earnings calls. The game of chicken, also referred to as playing chicken, is a game theory setup in which two players engage in an activity that will result in serious damage unless one of them yields. In the memory industry, this is the situation when all memory makers set out to increase supply.
Presently, Samsung Electronics has decided to increase its capex spend, while other memory makers announced supply reduction plans. This is a stark contrast to the chicken game seen before 2010 (all opted for supply expansion despite market downturn) as well as the profit-seeking strategy from 2010 (all went for supply cuts in the face of market downturn). Micron Technology’s recent announcement to reduce its output by 20%, up from the original 5%, shows that the memory market is not engaged in a game of chicken. Memory makers do not have to overly push for supply increase, as strong earnings can be generated once the unprecedented slump is over in a noligopolistic market. Samsung Electronics should enjoy market share gains in 2024-2025 as expected given additional supply cutbacks by rivals.
Shares find the first bottom, a temporary lull expected before a rally
We had previously forecast memory shares to find the first bottom in early 4Q22 and stage a rally after reaching the second bottom in 1H23, which will then be followed by an earnings turnaround in 2H23 led by DRAM contract price hikes. We had also projected the first bottom to be reached upon supply cuts and the second bottom upon an increase in demand. We believe our projections are still valid, but the stock market will need to wait for an upturn in demand in the near term since supply cuts have been recently confirmed.
Samsung Electronics and SK Hynix appear to have already reached the lower end of the PBR band at end-September. Samsung Electronics is likely to see its BPS rise despite the market downturn, while SK Hynix sees a temporary drop in BPS due to earnings loss. SK Hynix shares may again test a bottom going forward. Small/mid-cap stocks also bounced back in the footsteps of large-cap stocks. We recommend Wonik Materials, Wonik QnC, PSK, STI, Leeno Industrial, and ISC among the small/mid-cap stocks, as they are poised to enjoy brisk earnings.
A share price rally (second bottom) is expected as early as in 1Q23. Memory shares should move upward once orders begin to increase and the 12 month-forward EPS consensus starts to drift sideways (end of down-adjustments). This should be a period where all negatives are removed and positives emerge even though earnings continue on a downtrend.