Asia Memory-Bad memories fading

TMT
Memory Devices Technology
8 October 2010
abc
Elpida Memory (6665)
Global #3 DRAM maker with high specialist revenue component
of c43% for FY11e, including mobile DRAM
We lower FY10-11 operating profit forecasts by 6% and 27%
respectively on lower ASP assumptions
Maintain OW(V) rating, lower TP to JPY1,500 based on FY11e
target PB of 0.8x. Stock is oversold, in our view
Investment summary
Sensible growth strategy
A pure memory play with mostly DRAM
exposure, Elpida Memory was the third largest
DRAM manufacturer on revenues according to
IDC, with c17% share (Samsung: c34%, Hynix
c22%).
Having pursed a strategy that capitalises on its
shrink technology to reduce costs to a 5xnmequivalent
level, Elpida is now migrating to 4xnm
process to remain competitive versus the leaders.
For commodity PC DRAM, it is fully deploying
capacity at Rexchip, its Taiwanese subsidiary to
remain cost competitive. Elpida’s Japan fab
focuses on higher value-add products such as
mobile DRAM and specialist DRAM. To further
enhance its strong positioning in mobile DRAM,
it has co-developed with Spansion NAND that
would enable Elpida to capture the full margins
available by offering MCP (multichip packages).
Though we expect (as we do with all the memory
companies) next year’s earnings to decline y-o-y
from a high base, Elpida has upside risk from its
mobile and specialist DRAM exposure, which we
expect to account for c43% of FY11e revenue
(year-end March 2012). The stock is trading on
FY11e PB of 0.5x. We think it is oversold at
current levels.
Valuations, rating
We value Elpida using PB to derive a 12-month
target price of JPY1,500 by applying a target
FY11 PB multiple of 0.8x. Previously, we valued
Elpida at JPY3,000 using the same methodology,
but using a FY10e PB multiple of 2x. The stock
has historically traded at a PB of 0.3-2.4x.
Though we forecast Elpida’s operating
performance to decline from this year’s peak, we
believe our new target PB sufficiently reflects
downside risks; based on FY11-12e average 8.3%
ROE and 7.5% COE, the stock should in fact, be
valued at a PB ratio of 1.1x. But we believe
negative sentiment on DRAM demand, Elpida’s
weaker market positioning versus leaders,
execution risk of its process migration and JPY
strength limit shorter term valuation upside.
Under our research model, for Japan stocks with a
volatility indicator, the Neutral band is 10ppt
above and below the hurdle rate of 7.5% (risk-free
rate plus risk premium). This translates into a
Neutral band of -2.5% to +17.5% around the
60