TEXT-Fitch Street View: Encouraging Signs for Memory Chip Sector

Tue Feb 12, 2013 10:07pm EST

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(The following was released by the rating agency)

SYDNEY/SEOUL, February 12 (Fitch) Fitch Ratings believes that the DRAM and NAND memory semiconductor markets are likely to turn more favourable for manufactures in 2013, based on improving market dynamics and stronger profitability from both SK Hynix (Hynix, 'BB'/Stable) and Samsung Electronics (SEC, 'A+'/Stable).

Fitch expects the credit profile of Hynix and SEC to remain commensurate with their current rating levels in the short- to medium-term. DRAM market dynamics are favouring major manufacturers notwithstanding the prospect of weak PC growth continuing in 2013.

The PC DRAM market has effectively consolidated down to three major players - SEC, Hynix, and Micron Technology, Inc. (Micron). Micron took over Japan's Elpida Memory, Inc. in 2012, and Taiwanese makers, such as Inotera Memories, Inc. and Nanya Technology Corporation, are gradually exiting the PC DRAM market and focusing on either foundry or specialty DRAM to cut losses. In addition, the pace of process migration has slowed notably due to technological difficulties, and this will limit supply growth.

Therefore, the remaining players will have more bargaining power in 2013 and contribute to a tighter supply than in 2012. Demand for mobile DRAM is likely to remain strong due to growing demand for smartphones, and demand for server DRAM is likely to be fuelled by burgeoning growth in cloud computing. At the same time, downward adjustments to production levels including lower capex have contributed to an improved supply/demand balance since late 2012.

This trend is likely to continue in 2013. Fitch expects demand for NAND memory chips to remain strong in 2013, driven by growth in sales of smartphones and tablets. In addition, rising penetration of Ultrabooks is likely to create stronger demand for solid state drives compared with 2012. A significant oversupply caused NAND prices to fall substantially during H112 and resulted in NAND manufacturers scaling back their production levels during H212. Fitch expects chip makers to maintain a cautious approach to supply control in 2013.

Moreover, as industy capex is likely to fall in 2013, the extent to which NAND prices may fall in 2013 is likely to be more modest than in 2012.

The market will remain largely dominated by SEC (38% market share in 2012) and Toshiba (28%) as the first tier players, followed by Micron (14%), Hynix (12%) and Intel (8%) as the second tier players. Hynix's operating profit turnaround in Q412 further underlines the potential for the DRAM and NAND memory sectors to perform better in 2013. The company reported q-o-q 12% revenue growth (Q312: -8% q-o-q; 2012: -2% y-o-y) and a 2% EBIT margin (Q312: -1%; 2012: -2%). Likewise the performance of SEC's semiconductor segment in Q412 suggests a more favourable outlook, with q-o-q revenue growth of 10% (Q312: 1% q-o-q; 2012: -6% y-o-y) and EBIT margins of 15% (Q312 and 2012: 12%).

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