With the gradual recovery of demand in downstream mobile phones, PCs, servers and other industries, as well as the gradual implementation of storage capacity reductions by original storage manufacturers, we see that the prices of some major types of storage have begun to bottom out and reverse into the upward channel since 3Q23, and the stock prices of relevant domestic and foreign manufacturers have performed. Standing at the current point in time, we are still optimistic that the industry as a whole is expected to maintain an upward trend, and at the same time, it is recommended to actively pay attention to the track of each subdivision of the industrial chain. 1) Large-scale storage benefits from the short supply of HBM, and the supply and demand pattern is expected to continue to be optimized. 2) Niche storage is expected to follow the large categories of storage into the upward channel. 3) Server destocking is nearing completion, and the increase in DDR5 penetration rate is good for memory interface chips.
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Cycle review: 1) According to the changes in the market size, we can see that the fluctuation cycle of memory chips is about 3 to 4 years. Historically, the main drivers of the upward cycle are the explosion of terminal sales, the application of new technologies, and the merger/production reduction/insufficient capacity of wafer fabs. Factors contributing to the downside include overcapacity, the impact of the international economic situation and weak demand. 2) The stock price has a certain leading position compared with the company's fundamentals, and the time ranges from 1~2 quarters. 3) The trend of niche storage and large types of storage is highly synchronized, and there is a certain degree of overlap from the perspective of supply and downstream demand structure.
Memory chips: The production capacity of the supply side of major types of storage has achieved initial results, the prosperity of the demand side is gradually repaired, and the price is expected to continue to rise. Due to the shortage of DDR4 production capacity due to the squeeze of HBM and DDR5, we expect the DDR4 series products to continue to boom in 1Q24, and the demand for customer replenishment will drive the NAND off-season. The revenue of niche storage manufacturers has improved month-on-month, and the trend of industry recovery has become clearer.
Storage modules: The rise in the price of upstream memory chips has driven the price of modules to rise, and the demand for downstream servers and other products has been restored to raise the supply price. At present, the rebound in memory chip prices has increased the willingness of module manufacturers to stock + Taiwan and land module manufacturers have started strategic stocking in 3Q23, and we believe that module inventory is expected to be gradually released in 2024.
Memory interface chips: 1) The increase in server shipments and the expansion of the proportion of AI server shipments have led to an increase in the demand for memory interface chips. 2) The increase in DDR5 penetration rate + the fast iteration speed of the child generation has a strong demand for supporting memory interface chips and sets.
HBM: HBM's application alleviates the problem of "memory walls". According to SK hynix, HBM's demand will grow at a CAGR of 109% between 2022 and 2025. SK hynix, Samsung Electronics, and Micron Technology are competing fiercely, and each of them is working on HBM3E products.
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The application of AI is not as advanced as expected, and the production reduction of major original factories is less than expected.
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Historical review: The storage sector has a strong cyclical nature, and the trend of mainstream and niche products is relatively synchronized
The storage industry has a strong cyclicality, with a fluctuation cycle of about 3~4 years. According to WSTS data, from 2004 to the present, the global memory chip industry has experienced a total of 5 rounds of cycles, and is currently at the starting point of the 6th cycle, from the perspective of market size growth, 2006, 2010, 2014, 2017 and 2021 have seen growth peaks, respectively 20.6%, 55.4%, 18.2%, 61.5% and 28.8%. According to the changes in the market size, we can see that the fluctuation cycle of memory chips is about 3 to 4 years. Historically, the main drivers of the upward cycle are the explosion of terminal sales, the application of new technologies, and the merger/production reduction/insufficient capacity of wafer fabs. Factors contributing to the downside include overcapacity, the impact of the international economic situation and weak demand. High-tech + capital barriers in the storage industry have created today's oligopoly pattern, and the original factory adjusts capital expenditure and controls output, which in turn affects chip prices. The following is a historical review of the changes in capital expenditure, chip prices and stock prices of the three original manufacturers.
Chart: Global storage market size and forecast
Source: Bloomberg, WSTS, CICC Research
The spot price of DRAM is instructive for the storage cycle, and the stock price of the original factory is basically synchronized or advanced by 1~2 quarters. As the DRAM market has formed an oligopoly pattern, OEMs have a stronger ability to control prices, which can better reflect the cyclical nature of the storage industry.
Historically, the relationship between DRAM spot prices and the stock prices of Micron and Hynix shows that during the upward cycle, the stock price basically began to respond 1~2 quarters in advance, and basically fell synchronously after the price peaked, and in the downward period of the cycle, the stock price basically bottomed out and rebounded 1~2 quarters before the spot price bottomed out.
Chart: Micron's share price vs. DRAM spot price
Source: Wind, CICC Research
Chart: SK hynix stock price vs. DRAM spot price
Source: Wind, CICC Research
Depending on the change in demand, the capital expenditure of manufacturers also shows a cyclical character. In 2012, the European debt crisis weakened the global macro economy, and the rapid growth of supply-side storage particle shipments, oversupply, at this time, Micron's quarterly capital expenditure fell from 869 million US dollars in 4Q11 to 278 million US dollars in 3Q12;In 2015, the growth rate of smartphone demand slowed down and PC shipments declined significantly, and the demand was weak, and the capital expenditure of the three original factories decreased from 9.776 billion US dollars in 1Q15 to 6.371 billion US dollars in 2Q16;In 2019, the original factory production capacity was greatly implemented, the downstream procurement momentum weakened, and the price fell rapidly, and the capital expenditure of the three original factories fell from 1Q18 to 156$24 million fell to $10.310 billion in 3Q19.
In the upward period of the cycle, DDR3 replaced DDR2 as the mainstream product in 2013, and smart phones continued to sell well throughout the year in 14 years, wafer factories transferred their production capacity to mobile memory such as LPDDR, and the capital expenditure of the three original factories rose from US$4.227 billion in 1Q13 to US$9.442 billion in 4Q13; The development of AI and other fields has led to the expansion of demand, the rapid growth of server shipments, and the capital expenditure of the three major original manufacturers has increased from US$6.371 billion in 2Q16 to US$16.138 billion in 4Q17;
Chart: The relationship between the year-on-year growth rate of the three original CAPEX manufacturers and the change in the spot price of DRAM
Source: Wind, CICC Research
Niche DRAM/SLC NAND price movements converge with mainstream DRAM/NAND. The price trends of DDR3 4GB DRAM and DDR3 2Gb DRAM have overlapped significantly since 2H21, with the average price of 1M24 DDR3 4Gb/2Gb DRAM falling by 16%/14% year-on-year and increasing by 2%/3% month-on-month, respectively. We expect that the price of 32 Gb MLC NAND will remain stable, with the price of 1M24~2M24 remaining at $2.071/piece, and the price of SLC NAND 1M24/2M24 falling by 2%/1% month-on-month, respectively. In our view, SLC NAND price declines have narrowed and are waiting for prices to recover after demand recovers.
Chart: The price relationship between mainstream DRAM storage and niche storage
Source: DRAMeXchange, CICC Research
Chart: The price relationship between mainstream NAND storage and niche storage
Source: DRAMeXchange, CICC Research
The share prices of niche storage manufacturers in Taiwan are also ahead of the price action. The NOR Flash market has benefited from the development of 5G, IOT, automobiles, smartphone screens, etc., and the demand has increased, and the price of NOR has risen since 2017, and the price has fallen due to oversupply in 4Q18, and the stock prices of Taiwan's niche storage manufacturers Macronix and Winbond have begun to fall in 1Q18 In 2022, manufacturers entered the destocking cycle, terminal demand was weak, chip prices began to fall around 2Q22, and Taiwan's stock prices fell in advance in 1Q22.
Chart: The relationship between the stock prices of niche storage manufacturers in Taiwan and the prices of niche DRAM and NAND
Source: Wind, CICC Research
Chart: The relationship between the stock price of a niche storage manufacturer in Taiwan and the price of NOR Flash
Source: Wind, CICC Research
The upward trend of the industry is clear, and we should pay attention to the investment opportunities in the subdivided track
Large-scale storage: Supply and demand are optimized, and prices are on the rise
Demand has gradually recovered, supply has been optimized, and the price of memory chips has entered an upward range. The DRAM contract price began to fall in 4Q21 and bottomed out in 4Q23, while the NAND contract price began to decline in 3Q22 and rose in 3Q23. According to Trendforce, the quarterly contract price increase of DRAM and NAND Flash is expected to increase quarter-on-quarter in 2024. We believe that the production cuts of several major OEMs have achieved initial results, and with the gradual recovery of downstream demand for servers/smartphones and other products, memory chip prices are expected to show a cyclical rise in 2024.
The revenue losses of the three original factories have narrowed, and the industry recovery signal is obvious. According to the latest financial reports of the three original manufacturers, Samsung Electronics' revenue in 4Q23 was 67.78 trillion won, up 0.6% month-on-month and down 3.8% year-on-year. Among them, the revenue of storage business was 15.71 trillion won, up 49% quarter-on-quarter and 29% year-on-year. Samsung said that the improvement in the performance of the storage business was mainly due to the increase in the storage capacity of PCs and mobile devices, as well as the recovery in server demand driven by generative AI, and SK hynix's 4Q23 revenue of 11.31 trillion won and operating profit of 0.35 trillion won turned a profit. According to SK hynix, the company's DDR5 DRAM and HBM3 revenue in 2023 will increase by 4 times and more than 5 times year-on-year. For NAND flash memory, which is relatively slow to recover from market conditions, the three OEMs mainly focus on the efficiency of investment and expenses, and Micron's revenue in 2Q24 was US$5.824 billion, up 23% quarter-on-quarter and 57% year-on-year. Micron said that HBM production capacity is expected to be fully sold out in 2024, while demand for PCs and smartphones is expected to recover in 2024.
Chart: Samsung's quarterly revenue growth rate year-over-year and quarter-on-quarter
Source: Wind, CICC Research
Chart: Micron's quarterly revenue growth rate year-over-year and quarter-on-quarter
Source: Wind, CICC Research
Chart: SK hynix's quarterly revenue growth rate year-on-year and sequential
Source: Wind, CICC Research
Chart: Quarterly net profit margins of the three major OEMs
Source: Wind, CICC Research
The three OEMs will guide the improvement of storage market demand in 2024, and the production capacity will be allocated to high-end products. In order to meet the demand for high-performance DRAM, SK hynix will mass-produce HBM3E, a memory for AI, and develop HBM4, while combining high-performance, high-performance products such as 256GB DDR5 and 16GB~24GB LPDDR5T. High-capacity products are supplied to the server and mobile markets in a timely manner, expanding the supply of AI server modules such as MCRDIMM and mobile modules such as LPCAMM2, Micron expects Capex to be between $7.5~8 billion in 2024, mainly to support the production growth of HBM3E.
Niche storage: Shipments have increased and prices have stabilized
At present, the price of niche storage has stabilized, the shipment of Nor Flash has risen, and the price increase of large storage is expected to drive the price of niche storage. The international spot price of niche DRAM has shown an upward trend since the beginning of the year, the international spot price of SLC NAND Flash has stabilized, and the ex-factory price of NOR Flash will continue to bottom out in 2023, with shipments increasing significantly month-on-month since 2H23, with the ex-factory price of 12M23 NOR Flash falling by 5.04% month-on-month and shipments increasing by 7.16% month-on-month. We believe that the supply of niche storage is expected to continue to shrink under the plan of OEMs to reduce production and transfer more production capacity to high-end products such as HBM and DDR5, and the price of niche storage is expected to bottom out in 2024.
The monthly revenue of Taiwanese niche storage manufacturers improved month-on-month. Macronix's 1M24 revenue fell to -13% year-on-year and increased 4% quarter-on-quarter. Macronix said that the company's price strategy in NOR and small-capacity NAND and ROM in 2024 will remain stable, and it is expected that the performance of 1Q24 will bottom out, waiting for the industry to recover in the second half of the year, and Winbond's 1M24 revenue will increase by 31% year-on-year and decrease by 2% month-on-month. According to Winbond, market demand for SLC NAND and niche DRAM is gradually recovering, and it is expected that the price of niche DRAM will rise, driven by market demand for IoT, networking, surveillance and TV. The revenue of niche storage manufacturers in mainland China increased month-on-month, and the industry has shown a trend of recovery. GigaDevice expects revenue to increase year-on-year in 4Q23, which is the first time since 3Q22 that it has achieved positive growth in a single quarter. GigaDevice said that the rise of mainstream products will drive the price of the niche, and it is expected that the moderate rise will continue in 1H24, and the revenue of Puran Co., Ltd. in 4Q23 increased by 20.54% quarter-on-quarter, and the revenue increased quarter-on-quarter for four consecutive quarters, achieving a turnaround. Puran said that the company's product shipments have continued to improve since 1Q23, the destocking of consumer products is nearing the end, and the prices of various product lines have gradually stabilized.
Chart: GigaDevice quarterly revenue and growth rate
Source: Wind, official website, CICC Research
Chart: Puran shares' quarterly revenue and growth rate
Source: Wind, official website, CICC Research
Storage modules: The willingness to stock up is heating up, and the price of modules is rising
As the price of memory chips bottoms out, module manufacturers are more willing to stock up, and the price increase trend is passed on to the module side. According to Trendforce, the spot prices of 2M24 DDR4 and DDR5 modules increased significantly month-on-month, while the prices of KST DDR4 32G 3200/DDR5 32G 5600 increased by 18%/12% month-on-month, respectively. According to the CFM flash memory market, the price of SSD channel market and industry market has been rising steadily since 3Q23. We believe that although the first quarter is the traditional off-season for consumer electronics, with the transmission of upstream memory chip prices and the recovery of demand for downstream servers and other products, the performance of memory module manufacturers in 2024 is expected to continue to recover.
Chart: DRAM module spot price reference
Source: Trendforce, CICC Research
Chart: SSD channel market and industry market price trends
Source: CFM Flash Markets, CICC Research
1M24 Taiwan's major module manufacturers performed well, and their revenue has growth momentum under the trend of price increases. ADATA 1M24 monthly revenue increased by 63.75% year-on-year and 12.81% month-on-month, of which DRAM revenue accounted for 44.09% and SSD accounted for 30.15%, and the revenue of NAND Flash-related products including SSD, memory cards and pen drives increased by nearly 2% month-on-month. ADATA said that the price of DRAM and NAND in 1H24 is clearly rising, and quarterly profits are expected to continue to stand at the high level, and TEAMGROUP's 1M24 monthly revenue increased by 102.44% year-on-year and decreased by 56.33% month-on-month, and 1M24 revenue hit a record high in the same period in history.
Memory interface chips: The industry is nearing the end of destocking, and demand is picking up
DDR5 continues to penetrate, bringing more demand for memory interface chips and supporting chips. According to Trendforce, the DDR5 penetration rate in 2023 is about 13.4%, and it is expected that the proportion of DDR5 adoption will officially surpass DDR4 in 3Q24 due to the fact that the client extends the product cycle of old models, delays the introduction of new models, and expands the investment in AI servers to converge on the proportion of traditional server shipments. According to Yole, global server DDR5 memory module shipments are expected to reach 292 million in 2027, with a CAGR of 38% in 2024~2027. In addition to the upgrade of memory chips, DDR5 has also brought the upgrade of RCD, DB, and SPD, and added the necessary requirements of PMIC and TS.
The iteration of the child generation is accelerated, which helps to maintain the product ASP. According to Montage Technology's investor relations activity records, the company's DDR5 second-generation RCD chips began to be shipped on a large scale in 3Q23, and it is expected that the demand for second-generation RCDs will exceed that of the first-generation in 2024, and the company will take the lead in trial-producing third-generation RCD chips in 10M23, supporting a data rate of 6400MT/ S, which is expected to start large-scale shipments in 2024 with the release of the new generation of server CPU platforms from mainstream CPU manufacturers, and 1M24 has launched DDR5 fourth-generation RCD chips, supporting data rates of 7200MT/s, and has sent samples to major memory manufacturers. The iteration speed of DDR5 is significantly faster than that of DDR4, and the unit price of a new generation is usually higher than that of the previous generation, which helps to maintain the average sales unit price of the product.
Chart: Global Server DDR5 Penetration Forecast for 2023
Source: Trendforce, CICC Research
Chart: Global Server Memory Module Shipment Forecast
Source: Yole, Montage Technology Investor Relations Activity Record, CICC Research
Benefiting from the increase in DDR5 memory interface chip shipments, the performance of interface manufacturers improved in 4Q23 month-on-month. Rambus 4Q23 GAAP revenue of $122.2 million increased 16% sequentially. The company launched the industry's first Gen4 DDR5 RCD for server memory modules in 12M23 with a data rate of 7200MT/s. Montage Technology achieved revenue of RMB761 million in 4Q23, up 27.28% from the previous quarter. With the accelerated penetration of DDR5, Montage has achieved consecutive quarters of growth. Montage said that it is expected that industry demand will begin to resume growth in 2024, and the number of memory modules paired with a single server is also increasing, which will drive the overall demand for the company's related products.
Chart: Montage Technology's quarterly revenue and year-over-year growth rate
Source: Wind, CICC Research
Chart: Rambus' quarterly revenue and year-over-year growth
Source: Wind, CICC Research
Risk Warning
The application of AI is not advancing as expected. The demand side of the storage industry has benefited from the industry-level trend driven by the rise in the AI market. The storage industry participates in the development of AI in multiple dimensions, and there are large-scale data storage and transmission requirements in the AI industry, such as computing power construction, model training, and application implementation. If the application of AI is not as advanced as expected, the demand side of the storage industry may be impacted, and the prosperity of the industry may be affected.
The production reduction of major original factories is less than expected. The storage industry is cyclical, and the supply side is the oligopoly of Samsung Electronics, SK hynix, and Micron, which adopt the IDM model to control output, and the industry cycle is mainly affected by the prosperity of the demand side and the changes in production capacity on the supply side. At present, we believe that the effect of reducing the production capacity of major original factories has appeared, and if the original factory reduces production less than expected, it may affect our judgment of the inflection point of the storage industry cycle.
Article source:
This article is excerpted from: "Intelligent Computing Future Series IV: Storage, a New Chapter of Computing Granary" released on April 1, 2024
Tang Zongqi Analyst SAC License No.: S0080521050014 SFC CE Ref: BRQ161
Hu Jiongyi Analyst SAC License No.: S0080522080012
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