Asia Memory-Bad memories fading

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TMT <strong>Memory</strong> Devices Technology 8 October 2010 abc Hynix consolidated revenue breakdown 100% 80% industry-wide supply and our assumption of another 6% strengthening in the KRW. DRAM revenue (KRWbn), operating margins 60% 12,000 40.0% 40% 20% 10,000 8,000 6,000 20.0% 0.0% 0% 2007 2008 2009 2010f 2011f 2012f DRAM NAND MCP and others 4,000 2,000 - 2007 2008 2009 2010f 2011f 2012f -20.0% -40.0% Source: Company, HSBC estimates Revenue (KRW bn) OPM Consolidated revenue, OP (KRWbn) and OPM (%) 20,000 40% 15,000 20% 10,000 0% 5,000 - -20% (5,000) 2008 2009 2010f 2011f 2012f -40% Revenue OP OP margin(%) Source: Company, HSBC estimates For 2011e, we think the impact of lower ASPs is unavoidable. We forecast consolidated revenue to rise c6% y-o-y and consolidated operating profit to decline 10% y-o-y. At the parent level, this translates into a 4% increase in revenue and a 25% decline in operating profit. Our 2011e parent revenue forecast is in line with consensus, but our operating profit forecast is 9% below consensus. DRAM Revenue, margin outlook This year, we forecast consolidated revenue to rise 64% in KRW terms, on a 42% bit growth and blended ASP increase of 27%. We expect the KRW to strengthen 12% compared to last year. We forecast 2011e consolidated revenue growth to fall 4%; bit growth is to remain strong at 51% y-o-y but is offset by a 32% ASP fall on greater Source: Company, HSBC estimates We expect greater cost efficiencies (mostly by process migration and improved production techniques) plus operating leverage to expand operating profitability to 36.1% from 3.7% last year, reducing to 29.3% in 2011e. For 3Q10, Hynix guides DRAM ASP and bit growth of a ‘slight’ drop and mid-single digit rise respectively. Bit growth, ASP assumptions (%) 60% 40% 20% 0% -20% -40% -60% 2008 2009 2010f 2011f 2012f Bit growth ASP Source: Company, HSBC estimates Technology – process migration Positively, Hynix’s focus remains on profitability enhancement by 1) increasing higher margin DDR3 and specialist DRAM proportions and 2) cost reduction through process migration. DDR3 proportion at end-2009 was c50%; by end-2010 the DDR3 proportion should rise to c70-80%. 69
TMT <strong>Memory</strong> Devices Technology 8 October 2010 abc Together with Samsung, Hynix is leading the market in DRAM process migration. As at end- 2009, c45% of DRAM was made on the 54nm process, plus a low single digit proportion of 44nm process DRAM. Hynix is ramping 44nm production, initially focussed on the lucrative server market. Hynix achieved low-teens bit production on the 44nm process by 2Q10, slightly slower than previous guidance of mid-teens. DRAM process migration 100% 80% 60% 40% 20% 0% 2007 2008 2009 2010f 2011f 2012f 8xnm 6xnm 5xnm 4xnm 3xnm 2xnm Source: Company, HSBC estimates Nevertheless, the firm expects 44nm migration to reach 30% of DRAM bit production by end of 3Q and 50% by end of 4Q, following its revised capex in June. We expect Hynix to start mass production of its 3xnm process during 1Q11. growth areas of mobile, graphics, high-end server and specialist DRAM (used in consumer electronics). Hynix plans to raise global mobile DRAM market share to c30% in 2010 from c7.1% in 2007. Hynix expects the revenue proportion of non-PC DRAM to rise to 60% of total in 3Q (2Q: mid-50%; 2009: c53%). Server, mobile and specialist DRAM accounted for c20%, c10% and c10% of revenue in 2Q10. The main advantage of these segments, other than high growth rates, is relatively stable margins. Mobile DRAM prices tend not to be as volatile as PC DRAM; ASPs tend to fall c5% every quarter 5%. In addition to PC and server use, consumer electronics devices are now migrating to DDR3, driving continued recovery of ASPs for specialist DRAM. NAND Revenue, margin outlook This year, we forecast consolidated revenue to rise 39% in KRW terms, on 94% bit growth and ASP decline of 21%. We expect the KRW to strengthen 12% compared to last year. NAND revenue growth 4,000 20.0% Wafer capacity (kwpy), average fab utilisation 5,000 4,000 3,000 2,000 1,000 - 100% 95% 90% 85% 80% 75% 70% 3,000 2,000 1,000 - 2007 2008 2009 2010f 2011f 2012f Revenue (KRW bn) OPM 10.0% 0.0% -10.0% -20.0% -30.0% 2007 2008 2009 2010f 2011f 2012f Source: Company, HSBC estimates Wafer capacity (kwpy) Average utilisation (%) Source: Company, HSBC estimates Speciality DRAM A key Hynix strategy this year has been to diversify from commodity memory into rapid We forecast 2011e revenue growth of 53%; bit growth is to accelerate to 167% y-o-y on 33% rise in wafer capacity and process migration. We assume a 35% ASP fall. We also assume another 6% strengthening in the KRW versus the USD. 70
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