* Reduce exposure to DRAM stocks over the next 2-3 quarters
Given that the DRAM market is already rolling over in what should be a seasonally strong quarter, we believe the market environment will deteriorate further sequentially into 4Q07 and a seasonally weak 1H08.
That said, we advise investors to reduce exposure to DRAM stocks over the next 2-3 quarters. We downgraded Powerchip to Hold and ProMOS to Sell. We maintain Hold on SEC and Hynix.
* DRAM market has already peaked; capex discipline needed
As the DRAM market is unraveling again after a brief recovery during early 3Q07, we now expect CY07 DRAM ASPs to be down 46% YoY, exiting the year with new lows in terms of ASPs. We now forecast 4Q07 to be no longer in short supply with an excess of 0.2% vs. a 1.1% shortage previously. The poor DRAM market in CY07 is attributable to substantial capex-induced 91% YoY bit supply growth. In order to prevent another oversupply situation in CY08, the industry must reduce capex significantly. While we expect CY08F global DRAM capex to decline 12% YoY, capital intensity should remain high at 46%, not sufficient enough a cut to stave off the potential oversupply.
* CY08 likely to be another poor year for DRAMs
Therefore, we expect CY08 to be another weak year for DRAMs and forecast a DRAM ASP drop of 38% YoY with market oversupply of 4.4% compared to 6.3% in CY07. Also, we now forecast DRAM contract ASPs of US$1.80 (4Q07F), -13% QoQ, US$1.60 (1Q08F), -11% QoQ, and US$1.45 (2Q08F), and -9%QoQ before a slight recovery into 2H08F.
* A positive scenario is possible in CY08 though after severe pain early on
However, we believe that not everything is doom and gloom for CY08.
There is one potentially positive (or first pain then gain) scenario.
A drastic DRAM ASP collapse to below or near cash costs in early CY08 coule induce significant cutbacks in CY08 capex and accelerate the de-commissioning of "8" capacities, leading to a powerful supply-constraint-driven structural recovery into 2H08. In this scenario, a large capex cut/delay announcements should catalyze potential entry points into DRAM stocks.
* More competitive/diversified players should outperform weaker rivals
While we are cautious on all DRAM-related stocks, we believe some interesting pair trades are possible within the group. For example, we believe those with a competitive edge such as SEC and Hynix can outperform weaker rivals such as ProMOS (Sell; TWD 9.44) and Micron (NR; $11.00). SEC and Hynix's more diversified business mix should also provide a bit more cushioning during downturns. Risks to the upside/downside include memory chip capex, 8"de-commissioning, and global economic strength.
