Inventory Levels to Peak in 2Q23
The author is an analyst of KB Securities. He can be reached at jeff.kim@kbfg.com. -- Ed.
Raise target price to KRW80,000
We maintain BUY on SEC and raise our TP by 7% to KRW80,000; we revise 2024E OP up 15% to KRW42.5tn (+91% YoY) to reflect hikes to chip price estimates for 2H23 (DRAM YoY: +5%→+12%; NAND YoY: -9%→-1%) and 2024 (DRAM YoY: +12%→+31%; NAND YoY: -2%→+9%). DRAM/NAND inventories should peak in 2Q23, causing an upturn in chip prices in 2H23 (2023E DRAM ASP QoQ: 1Q -14%, 2Q -8%, 3Q +2%, 4Q +10%; 2023E NAND ASP QoQ: 1Q -17%, 2Q -10%, 3Q -3%, 4Q +3%).
Cut to memory chip capex to improve supply-demand dynamics in 2H23
We see SEC cutting its memory chip capex plans by 15% this year. We expect the memory chip arm to suffer losses in 1H23 (first time since 1Q09) on faster-than-expected price declines that began in 3Q22, causing SEC to delay some of its capacity increase/process migration plans; the resulting declines in supply and inventory levels should improve supply-demand dynamics in 2H23.
Inventory levels to peak in 2Q23; stock to rebound in 1Q23
During memory chip downcycles, SEC stock tends to rebound the quarter before downstream inventory levels peak (e.g., 4Q08, 3Q15, 1Q19) and then rally 25-80% in the nine months after the peak (1Q09-3Q09: +81%, 4Q15-2Q16: +26%, 2Q19-4Q19: +25%). This time, we see the downcycle-related inventory adjustment lasting a year (3Q22-2Q23), with inventories peaking in 2Q23. As inventories peak, North American data center operators and Chinese mobile device manufacturers, which are currently focused on reducing inventory, should start restocking memory chips. SEC is currently trading at an historical low of 1.1x 2023E P/B, suggesting downcycle concerns have been priced in. Focus should now turn to stock price rebounds driven by expectation of earnings improvement in 2H23. SEC will be releasing 4Q22P earnings on Jan 6; SEC’s inclination to cut its memory chip capex plans should be proportionate to how low earnings come in. Thus, the stock should be positively influenced even if earnings disappoint.