Semiconductor/equipment
The author is an analyst for Shinhan Securities. He can be reached at ym.ko@shinhan.com -- Ed.
Shares move sideways in July, but directionality remains intact
The faster-than-expected turnaround in semiconductor market conditions and share prices in 2Q23 was driven by a steep increase in demand for new high-end products like DDR5 and HBM3 chips. Demand for DDR4 and NAND should have improved only gradually. While the expansion of AI applications speeds up the adoption of high-end products, demand for existing products moves in pace with the overall economy. We maintain our forecast made in April that the market for DDR4 and NAND will stage a notable recovery in 3Q23-4Q23.
Concerns have risen over the pace of demand growth for DDR4 and NAND, which pales in comparison with the fast-paced gains of new high-end products from mid-May. But this had been anticipated. Contrary to worries, we believe existing products will gather strength in 2H23.
① Demand-to-supply ratio up from 88% in 1Q23 to 95% in 2Q23
The recovery of chip demand has been slow in absolute terms. However, we need to look at relative demand to properly assess semiconductor market conditions. The demand-to- supply ratio has recovered for DRAM from 88% in 1Q23 to 95% in 2Q23 and for NAND from 83% to 92%. The ratio is forecast to exceed 100% from 3Q23 onwards, with the effect of production cutbacks by chipmakers to be felt in earnest from mid-3Q23. We project inventory levels to drop from over 15 weeks in 2Q23 to nine weeks in 4Q23.
② Slowing pace of DDR4 price declines
Samsung Electronics and Micron Technology, which generate a relatively large portion of sales from DDR4 vs. SK Hynix, likely saw ASP levels fall 10% QoQ in 2Q23. We find it encouraging that the two chipmakers were able to limit price declines, with DDR4 ASP slowing its descent.
③ SK Hynix to move faster than expected in HBM3 capacity expansion
We have picked up signs of SK Hynix moving to expand HBM3 production capacity in the company’s supply chain in June-July. This means that the chipmaker is discussing shipment schedules for 2024 in detail with clients, and that the current market up-cycle could be stronger than anticipated.
Top picks: SK Hynix, Jusung Engineering, 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. Chipmakers with a large portion of new high-end products are likely to deliver stronger profits, which is the reason why we expect SK Hynix to rally at a steeper angle than competitors. Until its earnings release in the last week of July, we believe now is the last chance to accumulate the shares at attractive levels for this market cycle.
Among small/mid-caps, 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 investing in competitive products. With this in mind, we recommend Jusung Engineering and STI as our top picks.