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Morningstar | Lower Memory Pricing and Disciplined Expenditure will Support Memory’s Recovery in Late 2019

While we revise our fair value estimate for Samsung Electronics to KRW 51,000 from KRW 55,000 as we lower our pricing assumption for both DRAM and NAND memories, we think that the recovery on memory demand in late 2019 is not fully embedded to the current share price. The end demand for smartphones has slowed down significantly since last winter, and as a result, suppliers have been forced to cut down utilization rates to reduce excess inventories in the supply chain. We had been anticipating that the inventory correction may occur in early 2019, but larger drop on memory pricing and longer inventory correction were both above our expectation, which is the reason we cut our operating margin assumption of semiconductors to 31% from 41% for 2019. Meanwhile, following the sharp price decline of memories in the March quarter, we are even more confident that NAND demand will pick up in the second half, as lower cost will help handsets makers equip more storages per phone, as we have seen in the past. In the longer term, we retain our view that data traffic growth, which is triggered by the introduction of 5G, will drive memory demand.

According to Samsung‘s earnings conference call, average sales pricing, or ASP, of both DRAM and NAND dropped mid-20% in the March quarter, which is larger than our forecast of midteens percent. Market research suggests that DRAM pricing may continue to drop in the second half as inventories are not fully wiped out, and thus we revise our ASP assumption for DRAM to negative 38% from negative 17%. On the other hand, we raise our bit growth assumption of NAND to positive 36% from positive 28%, as we believe that sharp ASP drop in the March quarter will stimulate NAND demand. As the negative impact of the former is larger than the positive impact of the latter, we drop our operating margin assumption to 31% from 41.

Meanwhile, we are encouraged that Samsung is planning to significantly cut its capital expenditure for memories for 2019 as well as other memory suppliers, as we believe it also supports our view that memory’s demand-supply balance will tighten in 2020. While we acknowledge that the memory industry is a highly cyclical market, we view that the industry has become more disciplined than in the past, as smaller players have been wiped out of the market, owing to the larger marginal cost to achieve higher capacity per memory, and in fact, Samsung’s profitability at the bottom of each cycle is improving.