Asia Memory-Bad memories fading

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TMT <strong>Memory</strong> Devices Technology 8 October 2010 abc Supply drivers – DRAM Oversupply likely to persist through 2Q11 on sharply rising capacity from second-tier vendors, process migration Capex increases set to peak this year, with next year set to see single-digit rises, mostly for continued process migration Leading vendors shift towards more value-added high-end, mobile DRAM In retrospect… An anomalous state – supply squeeze in 1H leads to acute oversupply in 2H In March, we assumed that ASP decline would be gradual through the year. Instead, we are set to see an inverted-V ASP trend through this year. Key factors that impacted our original assumptions were the European financial crisis and slower than expected migration of second tier vendors. We had expected c8% average DDR3 ASP decline every quarter starting in 2Q10. But ASPs actually rose c6.8% during 2Q. In 1Q10 average DDR3 contract prices rose 12% q-o-q. In 2Q10, ASPs continued to rise on PC demand recovery and tight DRAM supply, and rose further as PC OEMs pulled in demand into 2Q10 from 3Q10 to counter the impact of a weak Euro zone, a situation aggravated by the Greek debt crisis. In the meantime, capacity remained relatively constrained as second-tier vendors struggled to sort process migrations. For leading vendors the DRAM industry environment in 1H10 was optimal. Samsung and Hynix not only enjoyed a favourable operating environment (from their point of view especially), but margins also benefited from early process migration to 5xnm and 4xnm during the period. And then the pin dropped. The combination of stronger demand and weaker supply than expected in 1H10 was setting the industry up for a weakerthan-expected 2H10. From 3Q onwards DRAM vendors face low q-o-q PC OEM demand growth partly due to a high 2Q comparison base and partly due to PC OEMs taking a more cautious demand outlook for the rest of the year. Exacerbating the situation is the prospect of soaring bit supply starting in 4Q10 as second tier vendors reach production yields for smaller nodes, plus Samsung raises wafer capacity. We expect DDR3 ASPs for 4Q10-1Q11 (averages for the quarter) to fall 18% and 11% q-o-q respectively. Nevertheless, when examining next year’s outlook, we need to take a step back and note that y-o-y comparisons should take into account that 2010 is a peak year; despite sharp ASP decline in 2H10, average DRAM prices for the full year are set to rise y-o-y (15% for DDR3), an unusual situation for the industry. 41
TMT <strong>Memory</strong> Devices Technology 8 October 2010 abc Short-term oversupply After a series of years of declining revenue growth, we estimate global DRAM revenue to rise 79% y-o-y this year, driven by 49% bit growth and blended ASP rise of c20%. For 2011, the situation is clearly different; we forecast global revenue to be flat (+1% y-o-y) as blended ASPs decline 32% y-o-y to below USD1.9, offsetting the c49% rise in bit supply. Over the next 2-3 quarters we expect the DRAM industry to suffer from pricing pressure on greater supply as smaller players overcome process migration difficulties and as larger players accelerate their own process migrations, plus in the case of Samsung, adds wafer capacity. Nevertheless, we forecast DRAM industry revenue to reach cUSD46bn by 2012e, almost doubling from last year’s cUSD24bn. DRAM revenue, supply bit growth, ASP trends 60,000 50,000 40,000 30,000 20,000 10,000 - Source: IDC, HSBC estimates 2008 2009 2010f 2011f 2012f Supply (1Gb, m) DRAM Sales (USDm) Blended ASP, 1Gb equ. (USD) Oversupply likely until 2Q11 3.0 2.5 2.0 1.5 1.0 0.5 - We forecast supply to continue outstripping; we estimate supply-demand sufficiency last year was c99.9%, and expect it to remain relatively tight until 4Q10, when surging supply is set to unbalance the market. Next year, we think oversupply could persist through 2Q11, with a more balanced supply returning in 2H11. DRAM supply-demand balance 40,000 30,000 20,000 10,000 - Source: HSBC forecasts 2008 2009 2010f 2011f 2012f 106 104 102 100 Supply (1Gb, m) Supply -demand ratio (%) We expect DDR3 average contract prices to fall 18% q-o-q in 4Q10 respectively. This appears realistic; in 3Q10 average contract prices for DDR3 and DDR2 have retreated 13% q-o-q, versus our forecast of 15%. This level of price erosion is well above Samsung and Hynix’s 3Q10 guidance of blended ASP decline in high single digits, and a ‘slight’ fall respectively (though the two firm’s ASP guidance is for blended, not for commodity DRAM). DDR2 contract and spot price (USD) 3.5 3.0 2.5 2.0 1.5 1.0 0.5 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 1Gb DDR2 128Mx 8 667 Mhz contract 1Gb DDR2 128Mx 8 667 Mhz spot Source: DRAMeXchange DDR3 enjoyed a 7-15% premium through much of 9M10, despite DDR2/3 production cross-over during 1-2Q10 due to strong demand for newer, faster memory by PC OEMs. However, in September, the premium narrowed to just 3% as more vendors ramp up on DDR3. 98 96 94 42
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