Asia Memory-Bad memories fading

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TMT <strong>Memory</strong> Devices Technology 8 October 2010 abc HSBC vs. consensus HSBC 2010e 2011e 2012e Revenue 60,787 83,749 98,318 EBITDA 12,620 25,679 32,510 EBIT (3,660) 6,553 10,748 Net income (4,999) 2,849 6,311 EPS (KRW) (1.5) 0.8 1.9 EBITDA margin 20.8% 30.7% 33.1% EBIT margin -6.0% 7.8% 10.9% Net margin -8.2% 3.4% 6.4% HSBC vs 2010e 2011e 2012e consensus Revenue -15.6% -11.9% -11.2% EBITDA -24.3% 9.2% -1.5% EBIT 134.8% 21.4% 15.5% Net income 798.2% -19.6% -14.0% EPS (KRW) 91.1% -18.4% -14.2% Consensus 2010e 2011e 2012e Revenue 72,064 95,109 110,667 EBITDA 16,677 23,510 33,007 EBIT (1,559) 5,397 9,304 Net income (555) 3,586 7,397 EPS (KRW) (0.8) 1.0 2.2 EBITDA margin 23.1% 24.7% 29.8% EBIT margin -2.2% 5.7% 8.4% Net margin -0.8% 3.8% 6.7% Source: Company data, I/B/E/S consensus Catalysts Industry-specific catalysts include DRAM ASP fall less than expected in the coming quarters PC demand better than expected on corporate demand pick up Higher-than-expected DRAM content per box on lower DRAM ASP Company-specific catalysts include: 40nm migration comes ahead of schedule Diversification of DRAM business to less volatile and more specialized areas like mobile DRAM. Risks Industry-specific risks include Sluggish PC demand, delayed corporate replacement demand tablet cannibalisation higher than expected Elpida’s possible alliance with other Taiwanese DRAM makers likely help create a more competitive environment among Taiwanese DRAM players Company-specific risks include: Inotera’s 40nm migration comes behind schedule Equity funding likely in 2H which should lead to equity dilution for current shareholders Valuations, rating We lower our 12-month target price to TWD20 from TWD25, derived by applying a target FY11e PB multiple of 1.9x (based on 12.2% ROE (11.3% previously) and 9.5% COE), compared to 2.1x before. We also roll over our PB target multiple to 2011e from 2010e. The PB multiple of 1.9x is close to the lower end of Nanya’s historical PB range. Our method for valuation remains unchanged from before. The stock has historically traded at a PB of 1.6-4.9x, with an ROE range of -47% to 9% (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 TWD20 suggests a potential return of 3.6%, which is within the Neutral band; thus, we reiterate our Neutral (V) rating. 81
TMT <strong>Memory</strong> Devices Technology 8 October 2010 abc PB vs ROE Forward PB band 6.0 5.0 4.0 3.0 2.0 1.0 50% 30% 10% -10% -30% -50% 80 60 40 20 - Price (TWD) 4.0x 3.0x 2.0x 1.0x Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 PB (x , LHS) ROE (%, RHS) Jan- 05 Jan- 06 Jan- 07 Jan- 08 Jan- 09 Jan- 10 Source: HSBC Source: Datastream, HSBC Assumptions on Nanya Tech TWDm 1Q10a 2Q10a 3Q10e 4Q10e 1Q10e 2Q10e 3Q10e 4Q10e Sales 14,121 15,718 14,916 16,033 18,337 20,440 22,437 22,535 GP 189 1,589 705 829 2,141 3,517 4,804 5,051 OP (1225) (516) (933) (986) 198 1,310 2,314 2,731 Net income (1625) (1086) (1277) (997) (719) 393 1,522 1,689 EPS (TWD) (0.48) (0.32) (0.37) (0.29) (0.21) 0.11 0.44 0.49 GPM (%) 1% 10% 5% 5% 12% 17% 21% 22% OPM (%) -9% -3% -6% -6% 1% 6% 10% 12% NPM (%) -12% -7% -9% -6% -4% 2% 7% 7% Utilization rate (%) 80% 87% 80% 83% 85% 88% 89% 90% Bit growth (%) -9% 3% 12% 29% 26% 21% 19% 9% ASP growth (%) -6% 9% -16% -18% -10% -8% -8% -8% Source: Company data, HSBC estimates 82
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