We  have  revisited our  global  memory  model  and  changed our  major
assumptions  given  meaningful  changes  to  both  supply  and  demand.  As  a
result,  we  make  significant  upward  revisions  to  DRAM  revenue  thanks  to
increased ASP  assumptions resulting  from  ongoing  tight  supply, while  our
NAND assumptions remain broadly  unchanged. Hence, we  turn  positive  on
DRAM and remain relatively cautious on NAND.
 DRAM should remain healthy due to structural changes: Despite strong
DRAM  prices,  we  do  not  expect  capacity  expansion  from  the  remaining
three players (SEC, MU camp, and SK Hynix), a difference from previous
cycles. We  expect  demand from server and  mDRAM to offset  muted PC
DRAM  demand.  Hence,  the  decline  in  blended  DRAM  prices  should  be
well below the historical average of 30%, and major DRAM makers should
continue to expand their margins.
 mDRAM market will expand into PC: Despite a slow down in high-end
mobile devices, we think unit growth in both smartphones and tablets will
continue  to  drive  mDRAM  demand.  Also,  LPDDR3  will  break  into  the
Ultrabook memory market on the back of higher bandwidth and efficiency
on top  of lower power consumption. Hence, in 2014 we expect  mDRAM
demand to comprise 38% of total DRAM demand which is comparable to
PC DRAM’s contribution of 40%
 NAND will move into moderate oversupply in 2014: We believe NAND
supply/demand dynamics will improve in 2H13 due to seasonal upticks in
demand and impact from SK Hynix's NAND capacity conversion. In 2014,
however,  we  think  NAND  market  will  be  in  oversupply  due  to  slowing
high-end  smartphone  market  and  relatively  high  supply  growth  from
capacity expansion. Hence, we forecast global NAND revenue growth to be
flat in 2014 after double-digit growth in 2013.
 All  about  SSD  for  a  game  changer  in  NAND  demand: Due to inferior
product mix changes in mobile devices, we expect NAND content growth to
decelerate in 2014. Given still high prices of SSD relative to HDD, NAND
prices  should  come  down  to  stimulate  NAND  demand  in  NBPC  market.
Although  3D  V-NAND  based SSD  will  enable  denser,  faster,  and  longer
lived SSD, it is likely to remain a small portion by 2014.
 Stock  implications:  With  changes  in  our  major  assumptions,  we  upgrade
SK Hynix to OW (see separate note published today) given that it has the
highest exposure to DRAM spaces, and maintain our Neutral ratings on MU,
Toshiba and SNDK. As the global number 1 DRAM maker, SEC will also
benefit but the impact on its earnings is likely to be relatively small given
that non-DRAM businesses (especially handsets) account for a meaningful
share of its total OP.