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The author is an analyst of KB Securities. He can be reached at jeff.kim@kbfg.com. — Ed.

We maintain BUY and TP of KRW80,000 on SEC. We see an inevitable earnings slump in 1H23 as DRAM/NAND shipments and prices are hit by weak demand and inventory adjustments from North American server companies, but we remain optimistic since: (1) supply-demand dynamics should begin to improve in 2H23 as the effect of decreasing downstream inventories and output reduction by chip makers begin surfacing; and (2) the drop in DRAM/NAND prices should slow as they edge near cash cost, while downward revisions to earnings consensus should end sometime near the 1Q23 earnings release (in April).

DRAM/NAND ASP to have fallen 70% in nine months

We expect a 19%/18% decline in DRAM/NAND prices for 1Q23. As such, total price drop over the past nine-month period (3Q22-1Q23) should amount to around 70%. A

widening of operating losses for the memory chip business seems inevitable with drops in chip shipments and prices boosting inventory valuation losses. However, prices should edge near the bottom in 2Q23 as DRAM/NAND prices close in on cash cost levels and the price drop slows to under 10%.

2023E OP of KRW9.8tn (-77% YoY)

We see losses for the memory chip business pulling down SEC’s 2023E OP to KRW9.8tn (-77% YoY), with 2Q23 marking the bottom (OP: KRW0.4tn in 1Q23, KRW0.2tn in 2Q23, KRW3.8tn in 3Q23, KRW5.4tn in 4Q23). Unintentional production cuts at SEC and capacity utilization adjustments by competing chip makers should begin affecting chip supply-demand dynamics from 2H23. As such, DS should see its losses widen throughout 1H23 before beginning to narrow in 3Q23 and turning black in 4Q23. Meanwhile, shares in SEC are trading at 1.2x 12m fwd P/B. Despite the expected earnings slump in 1H23, downside risk should be limited given that the share-price performance of semiconductor stocks tend to lead by six months.




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