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TMT <strong>Memory</strong> Devices Technology 8 October 2010 abc We estimate that Inotera’s 50nm technology proportion represents around 22% of total shipments in 3Q10, compared to the scheduled 50%. We believe the delay will likely affect bit growth in 4Q, where Inotera had targeted for 100% growth. On 42nm, Inotera will start its pilot run in late 3Q. It is expected to have mass production by 1H11. Bit growth, ASP assumptions (%) 150% 100% 50% 0% -50% 2008 2009 2010f 2011f 2012f Bit growth ASP Source: Company data, HSBC estimates Process migration 100% 80% 60% 40% 20% 0% 2007 2008 2009 2010f 2011f 2012f 9xnm 70nm 50nm 42nm Source: Company data, HSBC estimates Forecast revision On the delay of 50nm migration, lower wafer output in 3Q as a result of prolonged cycle time, we revise down Inotera’s 2010 forecast and now believe significant cost savings from node migration will only start in 4Q10-1Q11. We now forecast 4Q10 bit growth of 51% (company targets 100%) and 2010 bit growth of 27% y-o-y (previously 67%). We revise down Inotera’s 2010-11e OP margin to -4% and 11%, from 6% and 18% respectively, and expect the margin recovery only to happen in 4Q. We now forecast Inotera’s ASP to go down by 16% in 3Q and another 10% in 4Q. Forecast revision for Inotera TWDm __ Revised ___ __ Previous ___ __Difference _ 2010 2011 2010 2011 2010 2011 Sales 46,535 66,433 53,426 72,032 -13% -8% GP (1,987.1) 7,303 3,049 13,042 nm -44% OP (3,755.4) 5,642 1,125 11,385 nm -50% Net income (5,495.7) 3,167 (589.9) 8,100 nm -61% EPS (TWD) (1.2) 0.7 (0.1) 2.1 nm -68% GPM (%) -4% 11% 6% 18% OPM (%) -8% 8% 2% 16% NPM (%) -12% 5% -1% 11% Utilization 70% 70% 77% 77% rate (%) Bit growth (%) 27% 102% 67% 68% ASP growth (%) 4% -31% -5% -28% Source: HSBC For 2010, we forecast Inotera to remain at a loss of TWD5.5bn, but swing to net profit of TWD3.2bn next year. In 2011, we expect Inotera to achieve bit growth of 102%, on bit growth that has been delayed from 3Q-4Q as a result migration. We also forecast its margin to improve to 8% next year from -8% this year. 75
TMT <strong>Memory</strong> Devices Technology 8 October 2010 abc HSBC vs consensus HSBC 2010e 2011e 2012e Revenue 46,535 66,433 79,103 EBITDA 28,578 41,830 49,352 EBIT (3,755) 5,642 10,072 Netincome (5,496) 3,167 7,136 EPS(TWD) (1.2) 0.7 1.5 EBITDAmargin 61.4% 63.0% 62.4% EBITmargin -8.1% 8.5% 12.7% Netmargin -11.8% 4.8% 9.0% HSBC vs consensus 2010e 2011e 2012e Revenue -12.6% -3.1% 9.6% EBITDA -14.9% -7.7% 0.4% EBIT -329.6% -43.9% -33.7% Net income -2178.4% -60.5% -18.1% EPS (TWD) -761.2% -70.4% -37.9% Consensus 2010e 2011e 2012e Revenue 53,219 68,564 72,195 EBITDA 33,583 45,319 49,158 EBIT 1,636 10,050 15,188 Net income 264 8,010 8,715 EPS (TWD) 0.2 2.3 2.5 EBITDA margin 63.1% 66.1% 68.1% EBIT margin 3.1% 14.7% 21.0% Net margin 0.5% 11.7% 12.1% Source: Company data, I/B/E/S consensus Valuations, rating We lower our 12-month target price to TWD17 from TWD20, derived by applying a target FY11 PB multiple of 1.5x, compared to 1.7x before. Our method for valuation remains unchanged from before, but we roll over to an FY11e PB multiple from FY10e previously. We use a mid-point historical PB range to derive the multiple. The stock has historically traded at PB of 0.5-2.5x, with an ROE range of c2% to 25% (prior to the capacity glut starting in 2007). Under our research model, for Taiwan stocks with a volatility indicator, the Neutral band is 10ppt above and below the hurdle rate of 9.5% (risk-free rate of 4% plus risk premium of 5.5%). This translates into a Neutral band of -0.5% to +19.5% around the current share price. Our 12-month target price of TWD17 suggests a potential return of 4.7%, which is within the Neutral band; thus, we reiterate our Neutral (V) rating. PB vs ROE 3.0 10% 5% 2.0 0% -5% 1.0 -10% -15% 0.0 -20% Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 PB (x , LHS) ROE (%, RHS) Source: HSBC Forward PB band 60 Price (TWD) 40 2.4x 1.8x 20 1.2x 0.6x - Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Source: Datastream, HSBC Catalysts and risks Industry-specific catalysts include: Favourable DRAM demand and supply in 2010. Tight global DRAM supply given limited capex spending in 2009. Better than expected results and strong guidance from PC OEMs, such as recent Dell and HP results. PC demand to pick up from 2Q10 onwards, boosted by corporate replacement and upgrade spending. 76
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Asia Memory-Bad memories fading

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