SK Hynix with Buy (1) Calls; We See SEC As the [email protected] Likely Winner from the Coming Inflection Point Brian Cho
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Korea Information Technology 15 October 2015 Korea Technology Sector Initiation: technological inflection point on the way With the advent of 1x DRAM, 3D V-NAND and 10nm FF, 2016 should herald a major technological inflection point We look for new supply constraints to clear the way for a recovery in the global memory market from 2H16 SK Kim (82) 2 787 9173 Initiating on SEC and SK Hynix with Buy (1) calls; we see SEC as the [email protected] likely winner from the coming inflection point Brian Cho (82) 2 787 9182 [email protected] Investment case: We initiate coverage of the Korea Technology Sector Key stock calls with a Positive stance, and Samsung Electronics (SEC; 005930 KS, New Prev. KRW1,254,000) and SK Hynix (000660 KS, KRW36,400) with Buy (1) Samsung Electronics (005930 KS) ratings. We believe that SEC, backed by its cutting-edge technology in the Rating Buy memory and logic segments, is well placed to expand its earnings upon our Target 1,470,000 Upside p 17.2% forecast memory market recovery in 2H16 and a broadening of its SK Hynix (000660 KS) customer base for foundry. Our view of greater visibility on SEC’s recovery Rating Buy next year, together with the possibility of more clarity in the coming months Target 43,000 on shareholder returns, underlines our Buy (1) call today. Upside p 18.1% Source: Daiwa forecasts On a regional basis, we prefer SEC over TSMC (2330 TT, TWD136.5, Outperform [2]), as we think SEC will have the upper hand through stable memory earnings and earnings growth momentum from system LSI. Indeed, SEC is now Daiwa’s top pick in the regional tech space. Separately, as a result of its flexible product mix management, we look for SK Hynix to stage a rapid earnings improvement arising from our forecast recovery in the DRAM market in 2H16. SK Hynix declared its first annual cash dividend, of KRW218bn, at the end of 2014, and we expect a similar one for 2015. Group restructuring could also see further buyback schemes. Catalysts: Memory market forecast to recover from 2H16. We expect memory demand to remain weak in major applications and oversupply to persist until 1H16. However, given our view that supply growth will be tempered by slow technology migration, we expect the supply-demand balance to improve and the market to recover from 2H16. Technological inflection promises shake-up. The likely rise of 20nm/1xnm DRAM and 3D V-NAND in 2016 and 2017 will see SEC strengthen its already-sound position in the memory market, in our view. Meanwhile, on the logic side, we believe that SEC, after securing its technology leadership beyond 14nm FF, will be well placed to expand its customer base and market share in foundry, likely at the expense of TSMC. Valuation: We initiate our coverage of SEC with a 12-month TP of KRW1,470,000, based on a target PBR of 1.2x for 2016E. On SK Hynix, we have a 12-month TP of KRW43,000, set at a PBR of 1.2x for 2016E. Risks: The main risk to our Positive sector stance would be the potential market entry of China players, either through acquisitions or strategic alliances with existing players. A secondary risk would be a further decline in demand resulting from global macro conditions. See important disclosures, including any required research certifications, beginning on page 58 Korea Technology Sector: 15 October 2015 Sector stocks: key indicators EPS (local curr.) Share Rating Target price (local curr.) FY1 FY2 Company Name Stock code Price New Prev. New Prev. % chg New Prev. % chg New Prev. % chg Samsung Electronics 005930 KS 1,254,000 Buy 1,470,000 124,698 129,760 SK Hynix 000660 KS 36,400 Buy 43,000 6,310 4,808 Source: Bloomberg, Daiwa forecasts DRAM spot price trend NAND spot price trend (USD) (USD) 5.0 7.0 4.5 6.0 4.0 5.0 3.5 4.0 3.0 3.0 2.5 2.0 2.0 1.5 1.0 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar/13 Sep/13 Mar/14 Sep/14 Mar/15 Sep/15 Spot price - DDR3 4Gb 512Mx8 1600MHz Spot price - 64GB MLC (8Gx8) Source: DRAM eXchange, Daiwa Research Source: DRAM eXchange, Daiwa Research DRAM: technology migration roadmap comparison 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E SEC 25nm 20nm 1xnm SK Hynix 29nm 25nm 21nm Micron 3x 2x 20nm Source: Company, Daiwa forecasts NAND: technology migration roadmap comparison 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E SEC 19nm 16nm 1znm V-NAND V24/V32 V48 V64 Toshiba 1x 1y 1Z V-NAND V48 Micron 20nm 16nm V-NAND V32/48 SK Hynix 20nm 16nm 1znm V-NAND V36 48 Source: Company, Daiwa forecasts Logic: technology migration roadmap comparison 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E Intel 32nm HKMG 22nm FF 14nm FF 10nm FF 7nm TSMC 40/45nm 28nm SiON/HKMG 20nm SOC / 16nm FF 10nm FF 7nm SEC 45nm 32/28nm 20nm 14nm FF 10nm FF 7nm Source: Company, Daiwa forecasts 2 Korea Technology Sector: 15 October 2015 Table of contents Global memory market ............................................................................................. 4 Supply constraints to drive market recovery from 2H16E ...................................................4 Demand .............................................................................................................................4 Supply ...............................................................................................................................8 Impact of potential new entrants from China .................................................................... 10 Technological inflection point coming in 2016 .....................................................14 DRAM .............................................................................................................................. 14 NAND .............................................................................................................................. 15 Logic ................................................................................................................................ 15 Implications for the Korea Tech Sector .................................................................17 Risks to our Positive sector stance .......................................................................19 Company Section Samsung Electronics ....................................................................................................... 20 SK Hynix .......................................................................................................................... 43 3 Korea Technology Sector: 15 October 2015 Global memory market Supply constraints to drive market recovery from 2H16E We expect supply While we expect memory demand to remain subdued for major applications, the memory constraints to drive supply-demand balance should improve and the market should recover from 2H16 due to market recovery constraints on supply growth stemming from slow technology migration. Demand On our forecasts, demand for major applications, such as smartphones, PCs, TVs and tablets, will be stagnant until 2017. Thereafter, we believe overall demand will be spurred by increasing demand from the mid-range and low-end segments on the back of increased content in mobile devices. With the onset of new “form factors” (eg, foldable displays) for the high-end mobile segments, as well as the further commercialisation of the Internet of Things (IoT) (eg, smart cars), we expect the market to return to an upward trajectory. PC, TV, tablet and smartphone production growth 60% 53% 42% 40% 28% 20% 13% 9% 9% 7% 4% 3% 0% -1% -1% -6% -2% (20%) -11% -8% 2013 2014 2015E 2016E 2017E TV PC Tablet Smartphones Source: Daiwa Research At the product level, we highlight the following factors as central to our expectation of subdued global memory demand until 2017: Due to cannibalisation from smartphones and tablets, we expect demand for PCs to continue to decline until 2017. At its big event on 9 September, Apple unveiled, among other products, a flagship 12.9” tablet, the iPad Pro, which in some respects offers performance equivalent to that of a traditional PC. In this context, we believe that the traditional PC market will remain sluggish, and new form factors, such as the Stick PC, will be needed to unlock growth in the market on a long-term basis. Apple iPad Pro Apple iPad Pro: specs Operating System iOS9 Screen 12.9" Resolution 2732x2048, 264ppi Display Retina HD Chipset(RAM) A9 (64bit architecture) M9 motion processor Storage (GB) 4GB Rear:8MP Camera Front: 1.2MP Battery 11,000mAh Color Silver/Gold/Space Gray Size (mm) 305.7 x 220.6 x 6.9mm 713g (Wi-Fi) Weight (g) 723g (Wi-Fi + Cellular) Source: Apple Source: Apple Note: iPad Pro runs MS Office with functionality almost on par with that of a traditional PC 4 Korea Technology Sector: 15 October 2015 New form factors will The Stick PC (aka PC on a Stick) is a small-factor device that can be plugged into a TV or likely be needed to display and used for light productivity work. Given this form factor’s low price and high enhance PC demand mobility, we think users could ultimately own multiple Stick PCs, using each for its own specific purpose. Stick PC: new “form factor” Source: Intel Stick PC: specs Intel Google Product STICK1A32WFC ASUS Chromebit Price USD149 USD100 OS Window 8.1 with Bing 32-bit Chrome OS System Memory 2GB DDR 3L 2GB Flash Storage 32GB eMMc 16GB Processor Intel Atom processor Z3735F Rockchip RK3288 quad-core processor Intel HD Graphics Graphics ARM Mali-T764 graphics 1x HDMI 1.4a Integrated 802.11bgn Wireless Wi-Fi Peripheral connectivity Bluetooth 4.0 Bluetooth Micron