Expect Supply Shortage from 2024
The author is an analyst of KB Securities. He can be reached at jeff.kim@kbfg.com. -- Ed.
Maintain BUY, target price of KRW80,000
We maintain BUY and TP of KRW80,000 on SEC, as we see a slowdown in price declines, alleviation of inventory burden and the full-fledged effect of global chipmakers’ cuts to investment/production in 2H23. Indicators that point to a bottoming out of the industry downcycle (i.e., drop in clients’ inventories, slowdown in memory price declines, end to downward revisions to earnings consensus) should also be confirmed starting in 2Q23.
Expect supply shortage from 2024
While the memory industry is currently experiencing a supply glut, we expect a shift to shortage from 2024 given the effect of production cuts and delayed capacity expansion at Chinese chipmakers amid U.S. sanctions.
(1) SEC production should fall in 1H23 on delayed capacity expansion, realignment of production lines and migration to finer processes. Global chipmakers (SK hynix, Micron, Kioxia) should scale back capex by 50-70% YoY and reduce wafer input ~20-30% this year. The effect of lower production should be seen in nine months.
(2) China’s YMTC (NAND) and CXMT (DRAM) should lose their price edge/market share as U.S. sanctions hamper upgrades to production lines.
Stock insensitive to negative factors, sensitive to positive factors
Historically, in 3Q15 and 1Q19, prior to when memory inventories peaked, and in 2Q19 and 4Q20, periods when price declines began to slow, the stock rallied 32% on average. For 2Q23, we expect inventory to peak and price declines to slow (4Q22: -30% vs. 2Q23E: -10% QoQ), thus corrections should be short-lived, in our view, despite the 15% YTD rally. Given that the stock leads industry conditions by 6-9 months, the current stock price does not reflect an 1H23 earnings slowdown. Thus, we believe SEC stock is in a phase where it is insensitive to negative factors but sensitive to positive factors.