Supply-demand Conditions to Improve from 2H22

The author is an analyst of NH Investment & Securities. He can be reached at hwdoh@nhqv.com. -- Ed. 

 

While a memory market downcycle is likely to last from 4Q21 to 2022, such expectations have already been reflected in chipmakers’ share prices, which have pulled back over the last 10 months. Given that share prices tend to precede industry conditions by roughly six months, we advise making stock investment strategies, expecting share-price rallies rather than any additional corrections. 

Recently, demand for memory chips has been weak. Having benefitted from the Covid-19 crisis, PC demand has slid after peaking in 3Q21. While demand for data centers has been relatively healthy, data center investment is slowing on a decrease in utilization rates at data centers and government regulations.

We, however, positively view the fact that memory makers such as SEC and SK Hynix plan to make conservative investments in DRAM in 2022, considering weak demand. These moves should limit supply growth and improve DRAM supply-demand conditions in 2H22. We also draw attention to the likelihood that SEC’s foundry business and SK Hynix’s NAND business will enjoy fundamental improvements.

I. Memory supply/demand conditions unfavorable

Memory supply/demand conditions are to turn unfavorable from 4Q21, with DRAM contract prices likely falling 4% q-q in 4Q21 and 15% q-q in 1Q22. Record-high capex in 2021 finally began taking a toll on the market. On top of that, global PC demand has slowed, after reaching a peak in 3Q21. Data center DRAM demand has also declined, weighed upon by stricter government regulations, iOS privacy enhancement, and lowered peak utilization rates at data centers. Looking at mobile DRAM, global smartphone demand remains tepid, excluding for the iPhone 13 series and SEC’s foldable smartphones.

II. Supply/demand to improve from 2H22

We forecast that memory supply/demand conditions will start improving from 4Q22. First, the effects of supply control efforts by major chipmakers including SEC and SK Hynix (2022 capex is likely to be cut sharply) should materialize from 2Q22. Data center investment is also likely to resume from 3Q22, in line with the rollout of Intel’s Sapphire Rapids processor in 1H22 and anticipated peak utilization rate hike at data centers. Strong foldable phone sales and the roll-out of high-performance VR devices should help to spur mobile DRAM demand.

III. Focus on new technologies such as 3D SoIC and high-NA EUV

New technologies expected for 2022 include hybrid bonding, high-NA EUV, and SiC/GaN semiconductors. TSMC and AMD are planning to roll out 3D SoIC-based processors in 2022. Meanwhile, ASML is set to ship high-NA EUV equipment in 2023. We also forecast explosive demand growth for SiC/GaN power semiconductors in line with global EV market expansion. Related beneficiaries include ASML, Wolfspeed, TSMC, AMD, Park Systems, and Hanmi Semiconductor.

IV. Top pick

We maintain a Positive rating on the semicon sector. Although memory chip supply-demand conditions have started to deteriorate from 4Q21, related concerns have already been reflected in share prices over the past 10 months. Backed by chipmakers’ supply adjustment efforts and expected demand momentum (DDR5, etc) in 2022, supply-demand conditions should improve from 2H22. We advise paying attention to the full-fledged growth of SEC’s foundry division and the growing competitiveness of SK Hynix’s NAND division.
 

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