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In Time, Samsung's Plan Will Behoove Investors


More capacity will help next year; now is the time to strengthen balance sheets and build up cash.

Earlier in the week semiconductor investors were all in a "twitter" over an article in the Korea Times. The article quoted Kwon Oh-hyun, president of Samsung's semiconductor operations, suggesting that there may be a bubble in the business. The concerns about end-demand are supposed to be creating hesitation at Samsung in its capex plans.

While the article was viewed negatively by most, a careful read shows that Samsung wasn't changing its existing plan to invest ₩5.5 trillion. It is, however, reconsidering adding another ₩3.0 trillion to that figure.

Quite frankly, I'm all for that not happening and demand remaining tight. Let Michael Dell, CEO of Dell (DELL), continue to whine about "inflationary price increases" in the DRAM market.

While articles like that above create a lot of angst and gnashing of teeth over what's happening with demand for memory, there's a far better way to monitor the situation -- watch contract prices.

Contract prices are set twice each month for the various components. Don't get too worked up about spot market prices because they can be easily influenced by the decision to put or not put products into the spot market. More than once has an OEM dumped parts late in a quarter to get inventory off its books, so spot prices are not a terribly good metric.

Memory prices also have a seasonality associated with them, as you'd expect. The first calendar quarter is typically the weakest period, particularly after the Chinese Lunar New Year holiday. Demand begins to tick up in the second quarter as builds commence for what's referred to as the Dads and Grads period (i.e. Father's Day gadgets and graduation presents). Next comes the demand for back-to-school sales in the third quarter, followed by the big holiday build in the fourth quarter. The demand strength usually peaks by late November because any parts shipped beyond that point probably don't make it into consumer hands before Christmas.

What we were seeing in DRAM and NAND flash pricing throughout 2009 was a recovery as supply was removed from the market. And for the last three months or so, you see a counter-seasonal trend driven by tight supply.

You can see that counter-seasonality in the two graphs below. DRAM contract prices ran up rather dramatically heading into the third and fourth quarters. However, rather than weaken materially they remained flat for a few weeks. DDR2 prices dropped modestly in February, but that may simply be the result of the shift to DDR3 that is in progress. DDR3 contracts continued to show "inflationary price increases" and availability remains quite tight.

There's a very similar story with NAND flash prices as you can see in the second graph. Essentially, all the different part types moved up into the holiday build. We've since seen softening for some types of parts of about 5% but others simply remain flat. However, that performance is in sharp contrast to the normal 30% to 50% decline from the fourth quarter to the first quarter.

Despite the fact that memory manufacturers are expected to double capital spending in 2010 from the prior year, the 2009 figure was a record low. More importantly, what's going to be spent this year is largely technology spending or "shrinks." That will increase the number of parts per wafer but not really do a lot for the number of wafers per month.

That's why Samsung's decision is a good thing. While it wasn't stated, it only makes sense that the incremental ₩3.0 trillion being considered was for new capacity. Capacity can come next year. Now's the time to strengthen balance sheets and build up cash. The only way to do that is keep prices firm.
No positions in stocks mentioned.
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