Risks still appear high
We are impressed that chipmakers' guidance has not changed much over the past 2-3 weeks (eg, healthy chip orders, low inventories, no plan to cut back capex, etc) even as investors are getting more worried about a potential US recession. However, DRAM and NAND prices have declined by 15-20% over the past two weeks. We believe chipmakers' current guidance cannot warrant upside if actual sell-through of end products were to be hit by a US-led global slowdown. Our concerns are still (1) chipmakers' record high spending, (2) channel inventories and (3) sell-through of end products. The recent chip price erosions may suggest higher bit growth (sales volume increase) or spot market stabilization (or technical rebound led by speculators) as usual (price elasticity), but we are still worried about record high capex and low margin profiles on top of the US economy.
Key takeaways from our Japan conference
Three major memory companies - Toshiba, Hynix and Elpida - attended our Japan conference this week, which hosted about 1,700 investors and over 200 corporates. All the three companies denied reports that they were cutting back capex and facing order cancellations from their respective customers. Furthermore, they presented a positive outlook for the business by highlighting that: (1) DRAM price should recover or stabilize soon thanks to seasonality and lower supply growth, (2) NAND orders from OEMs remained healthy and that rumors about order cancellations were groundless, (3) price elasticity will continuously function well, particularly with the recent spot price weakness. They also expect a better pricing environment if supply growth turns weak, thanks to acceleration of 200mm fab retirement and companies facing more difficulties in using new nano technologies.
More cautious on Tier 2 pure plays
Spot prices have recently been weaker than expected (DRAM spot: US$1.5 currently vs our estimate of around US$1.8; NAND spot: US$6.8 currently vs US$7.5) with higher volatilities, whereas most memory chipmakers seem to be willing to maintain their target spending - as indicated by the three memory companies at our conference. This will drag industry upturn unless demand can absorb all capacity. We saw short-lived chip price strength this summer, indicating that short-term driven demand recovery (including speculative trading) can easily be counterbalanced by excess capacity. Our global supply-demand model still shows oversupply, particularly in DRAM, not only in 2H07 but also in 2008, if the chipmakers meet their target spending and capacity expansion. This may result in more severe price competition and acceleration of industry consolidation, coupled with Tier 2 players' poor cash flow and the difficulties they are facing in raising new capital. We believe this supports our Sell recommendation on Tier 2 plays, such as Taiwan DRAM stocks - Nanya (NNYAF; NT$22.55; C-3-8), ProMOS (PTGSF; NT$9.82; C-3-9) and Inotera (INMFF; NT$32.35; C-3-8).
