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Fitch: Lower Volatility For Memory Chip Sector
June 4, 2013 / 2:21 AM / 4 years ago

Fitch: Lower Volatility For Memory Chip Sector

(The following statement was released by the rating agency) SEOUL/SYDNEY/HONG KONG, June 03 (Fitch) Fitch Ratings expects global memory chip makers to experience a more moderate level of cyclicality due to supply side capacity adjustments and bourgeoning demand in emerging markets for smartphones and tablet PCs. Fitch recently revised SK Hynix Inc.'s (Hynix, BB) outlook to Positive, taking the view that the company's credit profile is likely to benefit from a tighter supply-demand balance. The key reasons were chip makers' conservative capacity control, the oligopoly structure of the industry following the merger of Elipda Memory Inc. into Micron Technology Inc. (the world's third and fourth largest dynamic random access memory (DRAM) makers respectively), and the gradual exit of second-tier Taiwanese manufacturers. Historically the memory semi-conductor business has been plagued by a high degree of cyclicality and over-capacity, and this has acted as a constraint on Hynix's ratings. Prices of commodity DRAMs used in PCs have rebounded by more than 60% since November 2012 with the average contract price of DDR3 4GB rising to USD25.5 in May 2013 from about USD15.5 in November 2012 according to DRAMeXchange. This stands in stark contrast to a record 14% yoy decline in global PC shipments in Q113 amidst anaemic economic growth in developed markets. The recent strength in DRAM prices is largely due to shifting product mix and supply side factors. Conservative capacity expansion and the ongoing capacity allocation shift away from commodity DRAMs used in PCs towards more profitable specialty usages, including DRAMs for servers and mobile phones (mDRAM), has played a vital role in addition to industry exit and consolidation activity. Moreover, PC manufacturers, aware of these supply side dynamics, have actually been stocking up on DRAM inventories to avoid any potential shortages as and when the PC market recovers. The Korean market leaders, Samsung Electronics (Samsung, A+/Stable) and Hynix, have lowered their portion of commodity DRAMs to less than 20% and 40% of the total supply respectively in Q113. Under this environment, Hynix's DRAM business, which accounted for 71% of total revenues in Q113, has turned profitable and helped the company's overall EBIT margin to improve to 11% in Q113 from only 2% in Q412 (2012 EBIT margin: -2.2%). Strong growth momentum for mDRAM demand is likely to be maintained in 2013 and 2014 given the ongoing proliferation of smartphones and tablet PCs. Competition in the mDRAM segment has intensified leading to significant price erosions as industry players seek to limit their exposure to PC DRAM. Nevertheless the outlook for the mDRAM sub-sector remains robust on the back of bourgeoning demand for low- to mid-end smartphones and tablets in emerging markets, especially China. In addition, the largest supplier, Samsung, is reserving at least 70% of its total output for its own mobile devices which limits the market supply. Hynix is the second largest mDRAM maker with a 21.7% market share in Q113, and the product accounts for about 30% of the company's total DRAM revenue. Apple is Hynix's largest mDRAM customer, but comparatively weak iPhone sales in the March quarter was negative for Hynix. Fitch believes this risk could be partially mitigated if Samsung ends up sourcing Hynix's chips for a portion of its Galaxy smartphone series. In addition, rising demand from China is also positive. Hynix recorded an EBIT loss in 2012 due to weak chip prices despite gradual improvement in H212. However, its EBIT margin recovered to 11% in Q113, and Fitch forecasts that Hynix's overall DRAM segment will achieve 17% revenue growth with 10% EBIT margin in 2013 (2012: -5.6%), largely on the back of expected strong demand for mobile and server DRAMs, as well as a stronger contribution from the PC DRAM segment. Contact: Alvin Lim, CFA Director +82 2 3278 8371 Matt Jamieson Head of APAC Research - Corporate Ratings Group +61 2 8256 0366 Steve Durose Head of Asia-Pacific TMT Ratings +61 2 8256 0307 Media Relations: Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available at ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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