Semiconductor/equipment
The author is an analyst for Shinhan Securities. He can be reached at ym.ko@shinhan.com -- Ed.
Two points lend support to growing hopes for imminent market upturn
Our previous reports highlighted expectations for an earlier turnaround in market conditions and share prices than initially anticipated for the current industry cycle, backed by rapid growth in demand for DDR5 and HBM3. The sharp increase in demand for new high-end products contrasts with the gradual recovery in pace with the overall economy expected for DDR4 and other existing products in 2H23. Against this backdrop, two points caught our attention during Micron Technology's recent earnings call.
1) Relatively weaker improvement in DRAM ASP vs. shipments in FY3Q23 (Mar-May): Significant growth in industry-wide shipments of server-use DDR5 and HBM3 started from April-May according to data stemming from SK Hynix, the only chipmaker offering 128GB DDR5 chips for sale at the moment. We had expected Micron Technology to report slower improvement vs. SK Hynix in ASP levels, considering that preparations were still underway at the company for the release of 128GB DDR5 as well as HMB3. Micron's FY3Q23 results confirmed our expectations, with the decline in DRAM ASP levels slowing down from 20% to 10% levels but overall results falling short given changes in bit growth (+mid-10% levels → +10% levels) compared with SK Hynix (Shinhan estimates: ASP - 8%, bit growth +45%). We believe these numbers point to: 1) limited downside to DDR4 prices (near cash cost levels); and 2) stronger confidence in DDR5 and HBM3 effects.
2) Forecasts for notable growth in demand for DDR5 & HBM3 in 2H23 through 2024: As Micron Technology was the first chipmaker to release CY2Q earnings results, market attention zoomed in on its comments regarding current demand and production plans for DDR5 and HBM3. Earnings comments hinted toward strong demand for HBM3 and increasing penetration of DDR5, with the company expecting DDR5 to account for a larger share than DDR4 in its DRAM shipments by end-CY1Q24. Amid the still-sluggish recovery in demand for existing products, Micron Technology's projections for a faster increase in demand for new products offer concrete support to our expectations for an earlier turnaround in market conditions.
Top picks are SK Hynix, Jusung Engineering and STI
We keep our OVERWEIGHT view on the semiconductor sector and SK Hynix as our sector top pick. Growing confidence in upbeat market trends for DDR5 and HBM3 should lead to steeper upward-revision of earnings forecasts vs. valuation multiples in the near term. The removal of valuation concerns and expansion of upside will likely proceed in three phases through the end of June, following Micron’s earnings call → announcement of preliminary numbers by Samsung Electronics → release of 2Q23 earnings by Samsung Electronics and SK Hynix. Lingering market concerns through July may provide the last chance in the current market cycle for investors to accumulate shares at undemanding valuations, considering that SK Hynix shares are highly likely to rally at a steeper angle than competitors going forward.
We also expect to see greater opportunities for traditional semiconductor materials, parts and equipment suppliers with the market upturn in sight. In particular, we focus on suppliers in SK Hynix's value chain linked to the migration to finer technologies (1a to 1b DDR5) and backend processes (128GB DDR5 & HBM3). Despite limited room for capex spend, SK Hynix will need to continue making investments for its competitive products such as DDR5 and HBM. With this in mind, we recommend Jusung Engineering and STI as our top picks among traditional suppliers.