No Scale-backs in Capex to Be Positive for Share Price
The author is an analyst of KB Securities. He can be reached at jeff.kim@kbfg.com. -- Ed.
Maintain BUY, TP of KRW80,000
We maintain BUY and our target price of KRW80,000 for SEC. Industry trends toward AI (incl. ChatGPT) spell a clear positive for future memory demand, while production cuts at SEC should improve memory supply-demand dynamics starting in 3Q23. Moreover, the sharp rise in 12m fwd P/E can be viewed as signs for a share-price rebound. There have been only five times over the past 20 years where SEC had seen a steep rise in 12m fwd P/E, and all those instances had coincided with the initial stages of a share-price run-up.
Memory prices to be near bottom in 2Q23
Memory prices are down 50% YoY as of 1Q23, with DRAM prices at all global memory makers below cost of production and NAND having already reached cash cost levels. If DRAM/NAND prices fall by an additional 29% in 1H23, DRAM should also reach cash cost levels in 2Q23. The prospects of both DRAM and NAND prices reaching cash cost levels should be viewed as signs that the memory chip industry is near the bottom.
No scale-backs in capex to be positive for share price
For 2023, we estimate SEC’s capex to be on par with that of last year, at KRW53tn. Given that much of this has been earmarked for future investments not directly related to production (i.e., EUV, infrastructure, R&D), however, memory capex is in effect expected to mark a decline of 13% YoY. According to research by our Quant Team, companies like SEC that spend big on capex even amid uncertain times (e.g., the pandemic) tend to enjoy higher share-price returns since it serves as an indicator of confidence in future demand. We believe downward revisions to consensus earnings estimates following the company’s 4Q22 earnings call have come to an end (2023E OP consensus of KRW16.8tn, based on KRW9.7tn~KRW21.4tn range), and that shares are now poised to enter a phase where they are likely to be more sensitive to positive, rather than negative, factors.