Downstream Chip Inventory Begins to Fall in 1Q23
The author is an analyst of KB Securities. He can be reached at jeff.kim@kbfg.com. -- Ed.
Downstream chip inventory begins to fall in 1Q23
We maintain BUY and TP of KRW80,000 on SEC. We continue to have a positive outlook, as key clients’ chip inventories, which increased throughout 2022, have begun to fall this quarter and should stay at healthy levels after normalizing in 2Q23. For 1Q23, we see a drop of 20% QoQ or more in memory chip inventories at both North American server companies (4Q22E: 10-12 weeks→1Q23E: 8-9 weeks; -20% QoQ to -25% QoQ), and Chinese smartphone manufacturers (4Q22E: 8-9 weeks→1Q23E: 6-7 weeks; -22% QoQ to -25% QoQ); this should cause restocking demand to pick up from 3Q23.
SEC chip inventory to peak in 2Q23
Unlike downstream inventory levels, SEC chip inventory (finished goods + goods in progress + feedstock) is increasing. However, SEC is likely to reduce output in 1H23 stemming from delays in capacity increase and production line rearrangements, indicating that 2Q23 will mark a peak for chip inventory levels. In the past 20 years, SEC stock has rebounded a quarter before inventory levels peak (4Q08, 3Q15, 1Q19) and rallied at least 25% in the nine months after the peak. As such, we see a rebound beginning in 1Q23.
Declining inventories to mark bottom for stock price
During downcycles in the past 20 years, falling inventory levels and decelerating chip price declines were followed by stock rebounds. This year, we see client inventories shrinking in 1H23, chipmaker inventories peaking in 2Q23 and the decline in DRAM/NAND prices slowing from 1Q23 (4Q22E: -30%→1Q23E: -20%→2Q23E: -10% QoQ), indicating SEC stock will bottom out in 1Q23. The market’s downward revisions to 2023E OP (consensus at KRW12-23tn vs. our estimate at KRW18tn) in the wake of SEC’s disappointing 4Q23P results seem to have ended. We believe SEC’s current stock price (KRW60,400 on Jan 10; 1.19x 2023E P/B) reflects downcycle concerns.