from Craig Ellis (Citibank) Asia trip report
1-Oct-06 10:40 pm
NAND FLASH (FLSH, SFUN, SNDK)
Our SNDK investment thesis has postulated that a healthy fundamentals backdrop and
strong manufacturing, product and pricing execution positioned SNDK as the best 2H
results story in our coverage. The trip added to our conviction in this regard. We expected
favorable fundamentals and near-term results and estimate revision momentum to spark the
shares following retrenchment last week on order cancellation and 2007 oversupply worries.
We continue to take a guarded stance on 1Q07 seasonality, though were surprised to hear a
Korean NAND manufacturer and concurrent US checks suggest seasonality could be more
benign than that observed in 1Q06. However, we acknowledge indications of a 4GB Apple
iPhone and possible 12-GB and 16GB nano products should not be ignored as even one of
these products could have a significant impact on the NAND balance.
1. SanDisk Takeaways Encouraging. For SanDisk, we unearthed a new regional
handset card distributor relationship, fresh indications that a Hynix/Toshiba royalty
deal signing in 4Q06 is possible this year which we see as a pre-condition to a
SanDisk/ Hynix royalty deal by mid-2007 (we think could add $5/share to SNDK)
and potential for increased sourcing availability at Toshiba into 1H07, implying
reduced Samsung supply requirements where component costs are ~20% higher
than at Toshiba.
2. Industry 3Q and 4Q demand indications healthy. Europe demand sounded slightly
better than we expected, in hindsight unsurprising given the week’s largelyfavorable
regional notebook commentary and USB drive pull-through implications.
Elsewhere, controller company indications of China demand strength in USB drive,
MP3, and handset cards compliments pre-trip US fundamentals strength in August
US retail card, drive and MP3 sell through and late-September US field checks.
3. Inventories appear lean. Though there were few specific remarks on component
and finished goods inventory parameters, demand commentary and spot/contract
pricing argue inventories are lean. Recall our own US field work suggests US retail
inventories are in the low-to-mid end of seasonal ranges while the week’s spot
prices increased in the low-single digits.
4. Nano NAND supplier share gets shuffled. The biggest supply side surprise was
Korean AAPL nano share gain, indicated by one Korean manufacturer at ~80-90%
for 2GB, 4GB and 8GB products, implying Toshiba share loss in the 2GB and 4GB
version versus our pre-trip expectations. Recall in Apple’s initial nano product
Toshiba was the primary 2GB supplier while Samsung dominated the 4GB product.
Given Toshiba’s node and density advantages, we suspect Korean manufacturers
have simply been more price-aggressive than the more customer-diversified
Toshiba. As such, intra-week competitor assertions that Toshiba’s MP3 business
was down ticked by Apple should be viewed in a competitive, rather than end demand
light.
5. Expressions of foundry interest in NAND unconfirmed. Intra-week reports
surfaced that Foundry NAND interest was producing a new partnership between
SanDisk and a large Korean foundry. We disagree (as did the foundries), noting
one foundry sees NOR a good fab filler but regards NAND as too competitive,
while another foundry seeks long term memory revenue growth but from
architectures playing to its logic strengths (in our view Matrix’s 3-D memory biz
which SanDisk acquired in 12/05 and where a foundry relationship already exists).
In summary, foundry memory interest appears focused on specific opportunities
away from floating gate NAND, suggesting supply-side risks are more likely to
derive from current manufacturers.
6. DRAM helping for now. DRAM demand is strong, unsurprising given early-week
3Q06 notebook demand indications. According to one manufacturer, inventories
are 1 week below normal (at 2 wks), with no evident signs of excess OEM builds,
though the manufacturer acknowledge limited visibility into OEM inventory levels.
Investors are reminded CIR analysts have recently become more cautious on n/t
DRAM fundamentals and upcoming seasonal pricing risks, with DRAM pricing
down 1% last week.
7. 1Q07 Seasonality Better This Time? Possible Though We’re Cautious For Now.
Memory manufacturer and US checks uncovered signs that 1Q07 pricing and
oversupply could be more benign than 1Q06 on more cautious late-year supply
additions and increasing new product and handset card demand. We are guarded on
this view, though note re-emerging buzz on 12GB and 16GB nano products (with
possible launch activity in 1H07 though note CIR’s R. Gardner believes nano price
points of $152/$250 would still need be hit), remarks of a 4GB AAPL iPhone (also
potential 1H07 launch), at density parity w/ SonyEricsson’s now-shipping i950
(uses SNDK’s iNAND embedded solution), and an absence of 2H06’s flagrant
NAND double-ordering which drove aggressive DRAM-to-NAND conversions in
late-2006.
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