Are Storage Chips Facing Another Downturn?

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September 19th has become a pivotal date for South Korea's semiconductor industry, particularly impacting SK Hynix, a leading manufacturer of storage chipsThe firm's stock prices experienced a drastic plunge on the Seoul Stock Exchange, reflecting broader anxieties within the sectorThis downturn was catalyzed by a report from Morgan Stanley, one of Wall Street's prominent investment firms, infamous for its far-reaching influence on market perceptions.

Morgan Stanley's latest analysis reflected a grim outlook for SK Hynix, downgrading its stock rating by two notches from "Overweight" to "Underweight." More alarming was the adjustment in target share price, slashing it from 260,000 KRW (approximately $200) down to 120,000 KRWThis strategic recalibration stemmed from the assessment that SK Hynix was losing pricing power amid declining demand.

In the wider context of the semiconductor landscape, the knock-on effects were quickly felt

Other major semiconductor players listed in Seoul also suffered as a result, with Hanmi Semiconductor declining by 8.2% and Samsung Electronics experiencing a fall of 3.4%. Such synchronized dips illustrate that investor confidence is currently fragile across the board.

The skepticism expressed by Morgan Stanley towards the semiconductor industry's future has sparked widespread debate and concern among industry stakeholdersSome experts argue that the High Bandwidth Memory (HBM) sector is actually witnessing a sound demand, bolstered by confirmed customer ordersBoth SK Hynix and Samsung have boasted of full sales for their HBM products scheduled for production up until 2025, thus alleviating some fears of oversupply.

Contrastingly, several analysts are voicing apprehensions over the sustainability of demand in light of recent market trends

Just as the sector seems to have enjoyed a revival, the question arises: has the temporary high for memory chips peaked, or is it merely a prelude to another downturn?

The path ahead for the memory market is multifaceted and requires nuanced analyses across various dimensionsNumerous domestic and international research agencies share a sobering outlook for the semiconductor market as it stands today—markedly less optimistic than previous forecasts.

Morgan Stanley has issued a warning regarding a potential downturn in the memory sectorThe investment bank attributes its caution to a downturn in demand from smartphones and PCs, which has subsequently led to a declining appetite for General DRAMAdding salt to the wound, an oversupply of HBM has begun to undermine pricing stability.

A closer examination of supply and demand dynamics concerning HBM reveals an interesting trend

HBM is recognized as a crucial component supporting artificial intelligence (AI) technologiesNevertheless, projections suggest that the growth rate of AI investments from major tech firms is projected to plummet from an astonishing 52% this year to a mere 8% next yearSimultaneously, Bloomberg has forecasted that 13 leading technology companies will see their AI investment growth rate shrink to 13.4% next year from 33.7% this yearThe stark reality is that the remarkable demand fueled by AI is expected to dwindle significantly.

Supply-wise, Morgan Stanley has estimated that production levels of HBM from memory manufacturers will reach a noteworthy 2.5 trillion Gb next year, substantially eclipsing demand, which stands at 1.5 trillion Gb—a disparity amounting to a surplus of 66.7%. It is anticipated that Samsung's aggressive foray into the HBM sector will primarily contribute to this oversupply.

What becomes increasingly evident is that as supply escalates and demand contracts, warnings of an imminent surplus in HBM products are no longer unfounded

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In terms of General DRAM, Morgan Stanley notes that the memory sector appears to have cycled through a complete phaseExpectations suggest that the cyclical dynamics of DRAM will plateau around the fourth quarter of 2024. Despite persistent strength in AI-related demand, the traditional end-market dynamics have exhibited signs of deterioration or stagnation, leading to an increasingly challenging pricing scenarioInitial indications point towards a significantly more adverse pricing environment throughout the fourth quarter of 2024, with a potential reversal in trends becoming evident by 2025.

With sell signals flashing for investors, Morgan Stanley forecasts the next decline in the cycle is likely to commence in 2025, perpetuating a cycle of oversupply by 2026, particularly as accumulated inventories heighten the challengeThere's relative health in NAND capital expenditures for 2025; however, many end-markets face overlapping customers and risks, leading to synchronized cycles between NAND and DRAM.

Morgan Stanley has also alerted the industry that as the current DRAM cyclical dynamics lose momentum, SK Hynix may find itself burdened with a deteriorating NAND segment

Coupled with the inherent risks associated with supply normalization, and capital expenditures for both DRAM and HBM predicted to surge, the risks post-2024 could be markedly underestimated.

TrendForce, another industry analyst, echoes the sentiment, reporting that the global consumer memory market is facing severe challengesData indicates a staggering 40% year-on-year decline in shipments from storage module manufacturers in the retail channels for consumer NAND Flash by the second quarter of 2024.

The current landscape reveals a transformative shift in the storage chip market; while consumer storage markets are finding themselves under considerable pressure, professional storage requirements exhibit strong demand, emphasizing that the AI server sector has solidified its position as a primary driver in the storage market.

This year’s robust recovery in the memory chip market can largely be attributed to a “low starting point.” The lackluster demand for consumer electronics in 2022 created an imbalance in supply and demand, leading to successive declines in NAND Flash and DRAM prices

Numerous storage firms suffered substantial losses during that period, prompting them to curtail production and raise prices in an attempt to rectify the supply-demand equationHowever, the ascent of AI technology has brought new possibilities, and after a prolonged adjustment phase, the memory market has gradually transitioned towards healthier growth.

Nonetheless, it is pivotal to note that AI may not act as the proverbial savior for the storage sector.

As for the CFM Flash memory market, it clearly reveals that consumer-centric storage is facing notable strainsSince mid-2023, prices in the spot market for storage products have consistently declinedCFM Flash market statistics indicate that the NAND Flash and DRAM spot price indices began to slump post-reaching peak levels in May, with values reverting back to those recorded at the end of 2023.

This downward trend stems mainly from subdued consumer electronics demand

According to CFM Flash market analyst Yang Yiting, expectations for smartphone shipments have not materialized as anticipated, and component prices are rising, placing significant hardware cost pressures on smartphone manufacturersConsequently, many producers have begun to downgrade specifications of cameras, screens, and memory in their devices.

DRAM has particularly felt the brunt of these adjustments, with high-end models decreasing from 16GB to 12GB, low-end models being reverted to 4GB, and an increasing proportion of sales for mid-range models, resulting in reduced demand for DRAMIn the NAND category, similar trends emerge as marketing strategies are adjusted to diminish demands for high-capacity configurations.

Looking specifically at the storage market dynamics in the third quarter, it is evident that the segment finds itself at a crossroads

While server storage remains relatively stable, consumer storage is encountering significant pressures.

With these analyses taken into consideration, the next logical step involves investigating the current market conditions.

Based on recent earnings reports from Chinese memory chip manufacturers, it appears they have yet to feel the effects of this so-called "cold wind." While these companies primarily focus on consumer electronics, their first half performance reports show impressive profit figures, reflecting a continued bullish trend without signs of decline.

Over the first half of the year, companies within the A-share memory chip sector enjoyed substantial growth, with a collective net profit increase of 146.26% across 25 listed entities

Noteworthy performances were recorded by companies such as Lianqi Technology, Jiangbolong, Baiwei Technology, Demingli, and Zhaoyi Innovation.

Lianqi Technology achieved operating revenues of 1.665 billion yuan with a staggering growth of 79.49%, and a net profit of 593 million yuan, marking a 624.63% growthJiangbolong recorded operating revenues of 9.039 billion yuan, reflecting a 143.82% year-on-year increase; net profits reached 594 million yuan with a notable growth of 199.64%. Similarly, Baiwei Technology saw operating revenues of 3.441 billion yuan and nets profit of 283 million yuan, returning to profit margins from previous losses.

A close look at product prices reveals that rising prices for storage components can yield positive effects for publicly listed companies focused on memory chips, and vice versa

Therefore, there is a necessity to track fluctuations in wafer costs and each firm's production and sales statuses concurrently.

Data indicates that eMMC and UFS pricing has declined, potentially due to weak consumer electronics demand resulting in oversaturationMeanwhile, Flash experiences contrasting price dynamics depending on various applications' needs, while DDR4 prices have dipped slightly, likely influenced by technology upgradesSSD price stability, albeit with slight monthly decreases, reflects fierce market competitionCollectively, these aspects reveal the storage market's shifting dynamics and the subsequent effects across various sectors.

The NAND index recorded a weekly decline of -2.84% and a monthly change of -5.08%, indicating noticeable decreases likely caused by increased supply juxtaposed with slowly rising demand

Within consumer electronics, such as smartphones and tablets, persistent upgrades in storage capacities have led to a heightened supply of NAND flashAdditionally, advancements in technology have probably resulted in lower production costs, thereby pushing prices down.

The Daily DRAM index also reflects a weekly drop of -1.75% and a monthly decline of -3.86%. The DRAM market experiences similar trends—namely, supply increases with subdued demandWhile sectors such as computers and servers usually maintain stable requirements for DRAM, continued advancements in technology result in high-performance DRAM and potential price drops for older product linesMoreover, the introduction of new manufacturing technologies and increased output may add competitive pressure on pricing.

Upsstream wafer prices have witnessed steady declines

In terms of supply, increased capacity might lead to overproduction, while slowly growing demand in fields like consumer electronics could contribute to this phenomenonAs wafers represent foundational materials for storage products, their price fluctuations continue to affect the entire supply chain.

In light of these significant market shifts, how should memory companies strategize to adapt to the evolving industry landscape? Jiangbolong's response during a recent survey indicated that following the surge in storage prices from late 2023 through early 2024, future pricing cannot be generalized; instead, it will exhibit a structural divergence based on application-specific contextsConsequently, manufacturers are shifting their production focus towards high-value segments in server markets.

According to analyst Wu Yating from TrendForce, memory module manufacturers began stockpiling DRAM after Q3 2023, resulting in inventory levels increasing to between 11 to 17 weeks by Q2 2024. However, consumer electronics demand has not rebounded as expected; the smartphone market is experiencing excessive inventory, while the notebook segment sees delays as consumers await AIPC's new product launches

Consequently, the price of memory components predominantly aimed at consumer products has begun to weaken, signaling significant challenges ahead for the global consumer memory market.

These circumstances indicate that storage companies must avoid blindly following the optimistic trends of the first half of the yearIn navigating the intricate landscape of the memory chip market, the ability to adeptly address looming threats posed by inventory and production capacity, particularly concerning high stock levels and the associated risks of price depreciation, will serve as a critical benchmark for the strategic positioning of firms within the industry.

Financial reports reveal that as of June 30, 2024, Jiangbolong's inventory values reached an impressive 8.833 billion yuan, constituting 69.11% of its current assets; Baiwei Technology reported inventory values of 3.577 billion yuan, representing 51.87% of total assets; while Demingli's inventory on the books accounted for 222.58% of its net assets at 3.38 billion yuan.

Should the memory market's recovery fail to maintain momentum, manufacturers overburdened with stock may find themselves teetering on the brink of inventory value depreciation, facing the ominous pressure of potential price reductions.

Overall, the storage chip industry is likely to experience a bifurcation, leading to a pronounced imbalance between supply and demand, signaling the necessity for proactive measures

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