Growing Trade Protectionism to Limit Supply
The author is an analyst of KB Securities. He can be reached at jeff.kim@kbfg.com. -- Ed.
DRAM prices expected to bottom out in 1Q22
— On Nov 23, SEC stock hit KRW75,300 amid a three-day rally, but it is still down 9.3% YTD (KRW83,000 on Jan 4). We believe DRAM prices will bottom out in 1Q22 because (1) North American cloud computing companies will begin adding servers for metaverse platforms in 1H22 and (2) the release of Intel and AMD’s new server CPUs should launch the first server replacement cycle since 2017.
— We believe 4Q21 will be the ideal time to increase weighting in SEC, as (1) DRAM prices should bottom out in 1Q22, (2) cloud server replacement demand is likely to spike and (3) SEC stock has undergone a price correction spanning 10 months.
Supply hitches to be larger than expected
— We see SEC’s DRAM/NAND bit growth slowing YoY in 2022, with the drop likely to be larger than expected:
(1) The Biden administration’s efforts to thwart semiconductor-related investments in China have derailed SEC’s plans for establishing a third NAND line at the Xi’an plant.
(2) SEC’s expanded foundry capacity at the P2/P3 plants (Pyeongtaek) has limited the space available for additional DRAM/NAND lines.
(3) SEC’s DRAM/NAND inventories are currently below normal levels. The expected drop in SEC bit growth (DRAM: +25% YoY in 2021→+16% YoY in 2022; NAND: +44% YoY in 2021→+31% YoY in 2022) should have a positive effect on global supply-demand dynamics.
Growing trade protectionism to limit supply
— We believe SEC, which has KRW100tn net cash, is the only chipmaker capable of responding to growing trade protectionism. With semiconductor investments in China effectively blocked, the adoption of trade protectionism, particularly by the U.S., Japan and Europe, is creating a need to establish local production facilities. As a result, chipmakers will have to focus overseas investments on localization, which will probably impede capacity increases and limit supply.