Blount / HDD Laterals; Samsung Flash Demand Slows
Investment conclusion
Recent data points from Asia, and checks on Samsung (2-EW / 2-Neutral, covered by Sangwan Kang) has convinced our colleague in
Asia to lower his NAND flash price assumptions for Samsung and estimates for the upcoming quarters, furthermore; he indicates that
Samsung has recently introduced another HDD-based phone with 8GB of capacity—the SCH–B570. Though HDDs and Flash memory
are competitive forms of storage, we believe this development further supports our assertion that HDDs and flash are complementary
products and at the same time tend to serve different use cases under the current pricing. We continue to favor Seagate with a 1-OW
rating.
Summary For more detail please see SangWan Kang's note on Samsung dated 8/23/06. Selected text is also attached.
HDD Laterals – Samsung NAND Flash Demand Slowing; New HDD-based Phone
Hard Disk Drives vs. NAND Flash – We find it interesting and positive for the HDD industry, that Samsung, the world’s
largest producer of flash and the company that has repeatedly forecast the death of the Hard Disk Drive, has recently
launched a new MP3 phone (Model SCH-B570) based on a 1” hard drive instead of flash. We believe Samsung has
recognized that a flash-based phone would likely be price prohibitive. As we mentioned in our HDD note from earlier this
week, Samsung has been the biggest share gainer in the HDD industry over the last 12 months and is bringing even more
capacity on line (through a supplier). Though HDDs and Flash memory are competitive forms of storage, we believe this
development further supports our assertion that HDDs and flash are complementary products and at the same time tend to
serve different use cases under the current pricing. We continue to favor Seagate with a 1-OW rating.
We believe Cornice, a privately held company, is supplying its 8GB 1” HDDs which are incorporated into Samsung’s new
SCH-B570 handset. Cornice has previously supplied its 3GB Storage Element Drive for Samsung’s earlier generation
handset, the SGH-i300, and its 8GB Dragon Micro Drive into the SGH-i310. We note that Samsung’s handset division
supports both NAND and HDD in its products and believe both forms of storage will be used depending on the application.
Using DRAM Exchange’s average spot price on 8/24/06 for NAND flash of $12.10/Gbit, we estimate that the current price for
an 8GB NAND Flash chip is roughly $97. This is a 14% premium to the list price of a 12GB 1” Cornice drive at $85 which has
50% more storage capacity. For mass storage, we continue to believe that HDDs offer a compelling value proposition for
th
handset designers and OEMs. We note that on August 7, 2006, Cornice released its 5
generation micro drive with 12GB of
capacity, and which, according to the company, represents roughly 5% of total battery consumption in a typical MP3 player.
The 12GB micro drives are available at $85 per unit in lots of 10,000 or greater, according to the Cornice.
Cornice 1” 12GB Dragon-2 Micro Drive Specs:
Power usage: 0.3mA – audio playback, 1.8mA –video playback
Transfer rate: 9.8MB/sec
Capacity: ~80hrs video on 3.5” screen
~7,000 songs @ 64KB/sec
~44hrs of VHS quality recording
~8 full length DVD movies
~14,625 pics @ 3 mega pixel camera
~163,800 pics to display on 3.5” screen
Size: 40mm x 30mm x 3.5mm (mobile version)
Weight: 10.9 grams (SE version)
Source: Cornice
Apple Laterals – SangWan Kang’s decision to lower flash price assumptions is a two-edge sword for Apple. On the positive
side, it suggests that Apple’s iPod margins will likely continue to rise due to lower COGS. On the negative side, the continued
decline in flash pricing suggests that there is not an inordinate product build occurring in the supply chain that would signal a
massive new product launch.
Samsung Phone Model SCH-B570 Specs:
• 8GB 1” HDD Micro Drive
• 2MP Camera
• T-DMB mobile television enabled
• Windows Mobile 5.0, enabled
• Bluetooth connectivity
• Integrated dual speakers
• TV-out
Source: Samsung
August 23, 2006
Samsung Electronics (W 646,000.00) 2 - Equal weight
Change in Earnings Forecast
Key Assumption Revision
Investment Conclusion
• We are revising down our NAND flash pricing and profit margin assumptions while making upward revisions on DRAM pricing, margins,
and F/X assumptions. We do not believe that Samsung is shifting back its NAND flash capacity to DRAM. Instead, there is a possibility
that the chip maker may slow down its original plan for continuing conversion from DRAM to NAND in 2H06. We do not think any
phone with embedded high density NAND flash chips such as 8GB would be price competitive compared to ones with the same
capacity hard disk under current chip pricing. Maintain 2-EW.
Summary
• We revise down our 3Q NAND flash ASP assumption from down 10% to down 20% q/q. For DRAM, we change from down 5% to down
2%.
• Samsung has introduced its 8GB 'Super Music Phone': not chips, but hard disk.
• We revise up our PT to W595,000 as concerns for further Korean won strength have eased.
Incremental Positives & Negatives
We see both positive and negative developments in the key earnings drivers behind Samsung’s main business lines. Incremental positive
factors include: 1) it seems that Korean Won appreciation against the US dollar looks to have eased off; and 2) the DRAM market is more
favorable towards suppliers. On the other hand, NAND flash chip prices have declined to a greater degree than anticipated by Samsung at
the beginning of July (down by a high single digit for 3Q). We expect Samsung’s stock price to remain range bound. We maintain our 2-
EW rating.
Key Assumption Revision
We revise our key assumptions as follows:
1) NAND flash: 3Q ASP estimate from down 10% q/q to down 20%, OPM from 32% to 27% (versus 25% in 2Q), shipment growth from 39%
to 35%.
2) DRAM: 3Q ASP from down 5% to down 2%, OPM from 30% to 33%, shipment estimate remains at 19%.
3) Telecom: 3Q handset unit estimate from 31.1mn units to 29.5mn. Our previous estimate proves to be too aggressive. While volume
shipments are improving sequentially from 26.3mn units in 2Q, shipment to Verizon seem to be improving at a moderate pace. We revise
the telecom division’s OPM estimate from 10.8% to 10.1% (versus 9.4% in 2Q).
4) F/X: Korean won/US dollar assumptions are revised from W/USD925 for 3Q and W/USD900 for 4Q to W/USD950 for both 3Q and 4Q.
Our previous estimates were based on our global F/X forecast, which remains unchanged.
As a result, our earnings forecasts have been revised.
We have revised up our price target modestly from W565,000 previously to W595,000, reflecting easing near-term concerns on further
Korean won appreciation and our slightly revised up earnings estimates for 2006 and 2007. At our new price target, Samsung Electronics is
valued at 13.8x our 2006 EPS and 2.3x BVPS estimates (12.6x EPS and 2.0x BVPS for 2007). Our previous price target of W565,000 was
based on 13.3x and 2.2x our 2006 EPS and BVPS estimates.
NAND Flash – DRAM Capacity
Although the market suspects that Samsung may convert its NAND flash capacity to DRAM under the current strong DRAM and weak
NAND flash prices, we do not think that the conversion would be cost efficient. Instead, we estimate that there may be a possibility that
Samsung may slow down its original plan of shifting from DRAM capacity to NAND flash in its line 9.
Samsung is producing both DRAM and NAND flash chips in its line 9 with a monthly 200mm wafer capacity of 100,000. The line has been
shared between DRAM and NAND at a mix of 4:6, which was supposed to transition to 1:9 by the end of this year. We sense that the shift
may slow down due partly to stronger demand for its legacy DRAM products, such as sync. buffer memory.
Samsung’s 8GB ‘Super Music Phone’: But Its Hard Disk
While many market watchers, who are on the bullish side, hope that Apple Computer will come out with its branded phones with embedded
flash chips, Samsung has just introduced its 8GB hard disk phone (SCH-B570). The handset is available for the domestic market with a
retail price of W800,000. The SCH-B570 allows users to store up to 1,600 (4 Mb) MP3 music files, 16 (400 Mb) PMP files, and 20,000 still
photos. The phone is also the first mobile phone with high-end audio features such as 5.1-channel virtual stereo and 3D sound. The S-
DMB phone also includes a picture-in-picture (PIP) display. We do not think any phone with embedded high density NAND flash chips such
as 8GB would be price competitive compared to ones with the same capacity hard disk under the current chip pricing. |
