Memory Supply-demand Downcycle to Intensify in 3Q22
The author is an analyst of NH Investment & Securities. He can be reached at hwdoh@nhqv.com. -- Ed.
The memory semiconductor downcycle is expected to intensify in 3Q22. That said, SEC should outperform its competitors on both the arrival of peak seasonality for IT sets and the IT giant’s effective pricing strategy.
Memory semicon supply-demand downcycle to intensify in 3Q22
Although maintaining a Buy rating, we lower our TP on Samsung Electronics (SEC) from W78,000 to W75,000, as we revise down our 2022 and 2023 earnings estimates to reflect a change in our 2023 DRAM price growth projection (-7% → -8%). For the semicon division, we now forecast 2023 OP of W39.5tn (previously W42.2tn).
SEC reported 2Q22 sales of W77.2tn (-1% q-q) and OP of W14.1tn (flat q-q). By division, OP came in as: DS (semicon) W10.0tn (+18% q-q), SDC (display) W1.1tn (-18% q-q), MX/NW W2.6tn (-31% q-q), VD/HA W0.4tn (-55% q-q), and Harman W0.1tn (flat q-q). Despite the downcycle, semicon earnings improved on DRAM shipment growth, an effective price protection strategy, and NAND price hikes. But, MX, VD/HA, and SDC earnings decreased due to both off-seasonality for client companies and a slowing in IT set demand.
Earnings relatively sound as peak season arrives for IT devices
We expect the DRAM industry downcycle to intensify in 3Q22. IT set demand is sluggish amid the global economic downturn. Inventory levels are rising on tepid sales of products such as smartphones and TVs. In an effort to reduce inventory levels, major set makers are trimming back their purchases of parts (including memory chips). Although healthy in 1H22, data center investment demand is likely to start declining visibly in 3Q22 as earnings at global hyperscalers (including Google, Meta, and Amazon) are starting to slow.
Positive share price drivers include continued tight supply of memory semiconductors and low valuations. The challenges in developing DRAM at 14nm or smaller nodes are rising. As the number of EUV applied layers increases, problems such as stochastics defects and line edge roughness (LER) multiply due to photon shot noise or light blur. This makes it difficult to control production yields. If the industry slump continues, new capacity investment planned for 2023 will likely be delayed throughout the industry, in turn reducing memory supply. SEC’s shares are currently trading at a 2023F P/E of 8.9x and P/B of 1.2x.
We forecast 3Q22 sales of W80.4tn (+4% q-q) and OP of W13.8tn (-2% q-q). By division, OP should divide as: DS W8.7tn (-13% q-q), SDC W1.5tn (+44% q-q), MX/NW W3.0tn (+16% q-q), VD/HA W0.5tn (+27% q-q), and Harman W0.1tn (-15% q-q). Despite sharp drops in semicon prices, the effects on earnings should prove limited given the arrival of peak seasonality for IT sets.