DRAM Inventories at Half of Appropriate Levels
The author is an analyst of KB Securities. He can be reached at jeff.kim@kbfg.com. -- Ed.
TP raised to KRW150,000; DRAM prices to rebound in 1Q21
We reiterate BUY and raise our 12m TP for SK hynix by 15% to KRW150,000 (12m fwd BVPS x 1.88x target P/B). Our TP was raised due to a jump in ROE (9.9% → 10.9%) triggered by upward revisions to 2021-23 earnings; we revise up our estimates, as we expect the rebound in DRAM prices (72% of SK hynix’s revenue) to be sharper than previously expected. Following a 7.0% slide in 4Q20, DRAM prices will climb for the next three subsequent quarters (+2.2% in 1Q21 → +6.5% in 2Q21 → +8.1% in 3Q21), averaging a 6.4% YoY increase (vs. 13.0% drop in 2020) in 2021. As such, earnings should bottom out in 4Q20 and begin pushing up from 1Q21.
DRAM inventories at half of appropriate levels; Mobile chip demand to grow at rapid pace
We believe DRAM prices will climb faster than initially because the power outage at Micron’s Taiwanese plant – amid conservative capex plans from Samsung Electronics and SK hynix – has stoked concerns for a supply shortage, leading to a jump in purchases. Furthermore, chipmakers’ DRAM inventories are depleting faster than expected, which will cut days in inventory to 10 days (appropriate level: 20 days) by the year-end. Meanwhile, demand will be boosted by (1) Chinese handset makers (e.g., Oppo, Vivo, Xiaomi) stockpile mobile DRAM in their race to secure a bigger share of vacuum created by sanctions against Huawei, while (2) North American data center operators (e.g., Amazon, Google) and enterprise OEMs (e.g., IBM, Dell) stock up on server DRAMs and SSD.
Upturn in NAND prices expected in 3Q21
We expect an upturn in NAND prices in 3Q21 given (1) SSD demand will be boosted by server replacement demand (first in four years) and (2) NAND capex will be small enough to quell concerns. Moreover, NAND manufacturers (incl. SK hynix, Samsung Electronics) are likely to remain conservative with capex when considering the low profitability of their NAND segments. With the main pillar of NAND demand shifting from mobile to server SSDs, SK hynix’s acquisition of Intel’s NAND unit has placed SK hynix in a position to boost its global enterprise SSD market share from 7% (fifth) to 37% (first; vs. Samsung’s 34%).