Asia Memory-Bad memories fading

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TMT <strong>Memory</strong> Devices Technology 8 October 2010 abc Winbond (2344) Defensive play in a steep commodity price correction environment with a successfully restructured, diversified niche portfolio Technology migration and flexible product mix to maintain margin Cut TP to TWD10.8 (from TWD12.5) to reflect higher macro risk using target PB of 1x; maintain OW(V) Investment summary Winbond’s memory portfolio restructuring story has ended on a high note after it successfully reduced its commodity DRAM portion to less than 2% (from c30%) of its portfolio in 2Q10. Financial results in 1H10 were good, thanks to tight supply of NOR on the back of the industry’s limited capacity. As the demand/supply in NOR has slowly approached a balance in 3Q, and while DRAM prices seem to have softened starting from 3Q, we believe Winbond’s superior portfolio is the most defensive among our Taiwanese DRAM coverage amid the memory price correction outlook in 2H10, given the stock’s current attractive valuation. Fundamentals A superior non-PC memory portfolio Winbond’s 40% revenue is contributed by specialty DRAM. The remaining contribution came from NOR (28%), Mobile DRAM (18%), graphics DRAM (12%) and commodity DRAM. (2%). A year ago, around 30% of Winbond’s revenue was contributed by commodity DRAM, a portfolio that is highly susceptible to DRAM price volatility hence impacting margin stability. More first-tier clients Most of Winbond’s clients are 3-6 month contract-based. This enables Winbond to have relatively stable margins while having high entry barriers as it takes time and effort to win client relationships. Winbond has demonstrated its superior quality by established first-tier clients in areas like specialty DRAM, mobile DRAM and NOR flash within the last few years. Flexible and diversified portfolio Winbond has the flexibility in adjusting its memory portfolio: as their product is not concentrated on a single memory type, capacity reallocation can be efficiently adjusted. More importantly, its memory production also supplies various diversified applications: Within specialty DRAM, HDD represents 36% of the total, followed by TV (17%) and networking (14%). This enables Winbond to focus on or divert to more lucrative applications when demand for a certain application is affected by seasonality. Specialty DRAM has strong growth of 27% q-o-q growth in 2Q, underpinned by top applications like HDD and TV growth. 93
TMT <strong>Memory</strong> Devices Technology 8 October 2010 abc Technology migration Winbond has successfully migrated its NOR production from 130nm to 90nm. In 3Q10, all 10k NOR capacity are in 90nm. For DRAM, Winbond’s target is to migrate its 16k capacity to 65nm. Ongoing migrations: Winbond has scheduled to further migrate 1) NOR capacity to 58nm by 2H11 and 2) DRAM capacity to 46nm also by 2H11. ASP and bit growth assumptions 80.0% 60.0% 40.0% 20.0% 0.0% -20.0% -40.0% 2008 2009 2010f 2011f 2012f Bit growth ASP Source: Company data, HSBC estimates Forecast revision 3Q10 revenue and margins should still be holding up well, thanks to the long-term contractual relationships which Winbond has built up with customers, together with strong demand from specialty DRAM and mobile demand, even though NOR supply/demand has come to a relatively more balanced situation. Winbond will likely post a gain of TWD0.8bn from the sale of its Nuvoton stake on the latter’s listing in late September. Following the sale, Winbond still holds 62.5% of Nuvoton. Revenue growth 40,000 30,000 20,000 10,000 - 2007 2008 2009 2010f 2011f 2012f Source: Company data, HSBC estimates Revenue (NTD mn) OPM 20% 10% 0% -10% -20% -30% -40% -50% We lowered Winbond’s bit growth for 2010 to 12% from 16% and revised down blended ASP for 2011 as memory price softening has come earlier than we expected. We now forecast Winbond to achieve 2010-11e revenue growth of 67% and 4% respectively, revised down by 2% and 4% respectively. We also lowered Winbond’s 2010-11e OP margin to 10.9% and 7.2% respectively (previously 12.6% and 9.3%) respectively on lower top-line growth. We are 2% and 4% below consensus in terms of 2010-11e revenue. Forecast revision for Winbond __Previous___ __ Revised ___ __ Changes___ TWD (m) 2010e 2011e 2010e 2011e 2010e 2011e Revenue 33,219 35,336 32,596 33,796 -2% -4% OP 4,172 3,289 3,561 2,431 -15% -26% Net profit 4,063 2,738 3,532 2,011 -13% -27% OPM 12.6% 9.3% 10.9% 7.2% NPM 12.2% 7.7% 10.8% 6.0% Source: HSBC Product mix We expect Winbond to maintain a relatively balanced portfolio among NOR flash, specialty DRAM and mobile DRAM in 2010, after successfully reduced commodity DRAM’s proportion. Despite NOR flash has come to a more balanced demand supply situation, we believe Winbond’s NOR flash bit growth will continue, underpinned by expanded capacity 94
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Asia Memory-Bad memories fading

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