Semiconductor/equipment: Another Big Cycle for Memory in 2021 – BusinessKorea
The authors are analysts of Shinhan Investment Corp. They can be reached at [email protected] and [email protected], respectively. — Ed.
Another big cycle for memory expected in 2021
In the memory market, supply is forecast to tighten further at inflection points in process technology, such as the shift to DDR5 and adoption of EUV in DRAM and transition to multi-tier structures in NAND. Demand should improve from the low base created from the COVID-19 pandemic, release of new game consoles, new platform launch by Intel, shift to 5G smartphones, and transition to DDR5. Upon removal of COVID-19 impact, another big cycle for memory is expected in 2021-2022.
With worst-case scenarios already priced in, semiconductor shares are seen to have bottomed out. Now is the time to focus on share valuations. We expect shares to rally going forward, driven by valuation merit in 3Q20, improvement in shipments and spot prices in 4Q20, and rise in contract prices in 1Q21.
Memory stocks to outperform non-memory stocks in 2021-2022
Memory stocks have underperformed non-memory stocks since the outbreak of COVID-19. However, overall changes in demand have been similar for both. Commodity-like memory chips tend to see prices fluctuate according to the transfer of inventory. Earnings consensus for non-memory makers has already started to recover from COVID-19 impact, and market expectations for memory chipmakers will likely rise in 2021and spark a steep upturn of memory stocks.
Memory stocks tend to outperform non-memory stocks in the later phase of up-cycles. Non-memory makers face less volatility in ASP levels and thus see immediate earnings growth upon the increase in demand and expansion of output. Memory chip companies, on the other hand, tend to see a slower start to the upturn in earnings as memory chip ASP levels continue to decline until the depletion of inventory. However, in the later phase of up-cycles, memory makers typically enjoy stronger growth in earnings and steeper share price gains on the upturn in ASP levels.
This pattern was once again confirmed in the earnings consensus and share performance recorded during the previous market up-cycle. Earnings consensus and share performance of non-memory peer TSMC first started to improve, followed by memory stocks in the later phase of the cycle. The combined weight of non-memory stocks far exceeds that of memory stocks in the PHLX Semiconductor Sector Index. We expect memory stocks to enjoy a stronger rally than non-memory peers towards the later phase of the current up-cycle in 2021-2022.
Strong downside rigidity; Momentum driven by shipment growth to become visible in September-October
We expect to see strong downside support for memory stocks, with no more negatives likely to weigh on the memory market. Expectations for a further decline in 32GB server DRAM ASP (down to USD100-110 in 4Q20) are already priced in at current price levels. Considering the USD100-level bottom recorded in the previous market cycle, further downside risks are limited in our view.
Samsung Electronics shares have started to rally first, backed mainly by the increase in non-memory orders and recovery in demand for smartphones. We note clear improvement in shipments (restocking of inventory), which is a major momentum for the memory sector. The placement of heavy orders by Huawei Technologies has accelerated the depletion of inventory. Chip demand for mobile devices has also started to improve. We will likely see stronger upside for semiconductor stocks as a result. As equipment stocks are also likely to climb, investors should pay attention to not only Samsung Electronics and SK Hynix, but also Wonik IPS, LOT Vacuum, PSK and TES that stand to benefit from increased adoption of multi-tier stack structures in NAND.
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