Samsung Electronics: Improving Memory Chip Supply and Demand Dynamics

The author is an analyst at KB Securities. He can be reached at [email protected] — Ed.

Memory prices will bottom out in 2Q22

We maintain BUY and TP of 100,000 KRW on SEC as the company should have stronger pricing power with DRAM/NAND supply and demand dynamics starting to improve in 2Q22. Containment measures in Xi’an, China and the impact on Kioxia production as factors are expected to cause memory prices to bottom in 1Q22. In addition, DRAM/NAND inventory levels at enterprise customers and memory manufacturers are decreasing. Therefore, we see memory prices becoming favorable. ASP NAND should rebound (-3% in 1Q22 vs. +3% Q/Q in 2Q22) and ASP DRAM dips should slow (-6% in 1Q22 vs. -2% Q/Q in 2Q22), then bounce back in 3Q22.

1Q22 forecast: OP of KRW13.4tn to beat the market consensus

We forecast 1Q22 revenue and OP at KRW74.4tn (-2.9% QoQ, +13.8% YoY) and KRW13.4tn (-3.2% QoQ, +43.1% YoY; 18.0% OPM), respectively, with OP beating the market consensus of KRW13.0tn. In terms of divisional OP, we estimate Semiconductor at KRW7.8tn, IM at KRW4.2tn, DP at KRW0.5tn, CE at KRW0.8tn and Harman at KRW0.1tn. We believe 1Q22 inventory levels are highest for mobile, followed by servers and PCs. Inventories of server and PC companies have normalized this quarter while those of mobile phone companies Apple and Samsung Electronics are below normal levels; Chinese mobile phone companies’ inventories fell this month. Overall, we see improving supply and demand dynamics in 2Q22.

Memory prices are strongly affected by psychological factors; pricing power to strengthen

Starting in 2Q22, we expect Samsung and other global memory companies to have greater pricing power given strong memory demand from North American data centers and PC companies and declining inventory caused by supply shortages. Memory prices are heavily impacted by psychological factors, so major customers should start buffering inventory given the prospect of higher memory prices in 2Q22. The SEC stock is down 5.6% year-to-date due to weak production yields at foundries and a lack of growth potential. However, these discount factors should fade as earnings start to improve in 2H22. We forecast 1H22/2H22 OP at KRW26.6tn/KRW30.4tn (+14.1% HoH).

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