Memory Price Declines Expected To Slow in 2023; Reducing SK Hynix’s FVE to KRW 133,000

After incorporating the impact of the prolonged inventory correction, our 2023 earnings forecasts for South Korean memory suppliers are significantly lowered. Contrary to our earlier expectation, the corrections for smartphones and PCs are becoming more severe in the second half, due to the weaker demand triggered by the macroeconomic uncertainties. As a result, the memory oversupply came in a few quarters earlier and much longer than anticipated, making price erosion more serious. Hence, we cut our 2023 operating margin forecasts for Samsung and SK Hynix from 15.9% and 20.4% to 11.8% and 4.5%, respectively. On the other hand, we are encouraged that major memory suppliers are taking action to digest excess inventories and address oversupply. As such, we retain our view that memory’s supply/demand gap will be the largest in the second half of 2022, and so we believe the pace of price declines will slow in the coming quarters, implying suppliers’ shares are currently at the bottom of the cycle. We reduce our fair value estimate for Samsung to KRW 73,000 per share (from KRW 80,000) and USD 1,300 per GDR (from USD 1,540), and for SK Hynix we lower to KRW 133,000, from KRW 142,000. We believe both shares are undervalued.