Taiwan DRAM
Where Is the Value?
Investment conclusion: We reiterate our Cautious
view on Taiwan DRAM. Rising unemployment may
further weaken consumer spending leading to a double
dip in DRAM prices by 4Q09. We raised EPS/PT on
Inotera (3474.TW, NT$17.50, EW, PT NT$15), Nanya
(2408.TW, NT$6.22, UW, PT NT$5), and PT on
Winbond (2344.TW, NT$6.67, EW, PT NT$6). Within
sector, prefer Inotera due to stronger business model,
technology partner and balance sheet. Powerchip
(5346.TWO, UW, PT NT$3) has liquidity risk. Nanya’s
capital position should improve after Formosa Group’s
announced capital injection following reverse share split.
Where we differ: Market’s view: DRAM price will
rebound further, because of ~2-3 months’ lead time to
increase output. Our view: A profitless recovery.
Without external funding to fully upgrade 50 nm and
meet debt obligations in 2010 after 2009 extension, a
100% rebound in DRAM prices to ~US$2.5 per chip
needed – unlikely in our view.
What’s next: Excessive fund-raising is culprit in current
DRAM oversupply. Little has changed. After heavy use
of rights issues, GDRs and ECBs, DRAM makers are
back in fund-raising mode, including private placements.
Nanya, Powerchip, Inotera, and Winbond have all
announced such plans.
Proprietary analysis: As DRAM makers attempt to
generate cash by adding wafer production, spot price
could jump 100%+ from December low to US$1.5 per
chip – the sharpest rise since 9/11. Taiwan DRAM stock
prices are up ~200%+ since November lows – also
sharpest rise since 9/11.
Where is TMC? Government-backed TMC missed
chance for attractive deals with Elpida/Micron, which
have secured funding. Believe it can still set up new
DRAM company as non-profit R&D center in Taiwan to
offload existing DRAM makers’ licensing/royalty costs.
However, using taxpayer money to consolidate existing
DRAM companies/fab assets is being challenged by
Legislative Yuan. Development Fund’s current mandate
for only ~NT$10 bn (~US$300 mn) for investment in
DRAM may not be enough to make a difference.