When the market narrative shifts from "AI memory" to "overall memory recovery," is it Samsung's opportunity?

In the latest research report released by JPMorgan Chase, detailed analysis was provided on various key issues regarding Samsung Electronics in the semiconductor field, including the latest progress of Samsung Electronics' High Bandwidth Memory (HBM) business, the outlook for DRAM and NAND markets, changes in capital expenditure strategy, and the potential impact of the US chip bill on Samsung Electronics' investments in US wafer fabs.

Analysts believe that despite Samsung Electronics' poor performance since the beginning of the year, the profitability of its core business and the long-term trend of the semiconductor market still provide strong support for its stock appreciation. As the market narrative shifts from "AI memory" to "overall memory cycle recovery," the stock may react more positively.

Qualification Certification and Production Status of HBM Business

Samsung Electronics' progress in the HBM field has attracted much attention. In this regard, JPMorgan Chase stated in the research report that by the end of 2023, Samsung Electronics had completed HBM3 qualification certification with three major GPU customers and entered mass production. Sample testing of HBM3E 12-Hi is underway, with wafer stacking expected to start in the second quarter of 2024 and mass production to ramp up in the third quarter.

JPMorgan Chase estimates that by the end of 2024, Samsung Electronics' HBM capacity will increase from 60k at the end of 2023 to 130k/month.

Impact of HBM Business on Samsung Electronics in 2024/2025

In the global memory market update in February 2024, JPMorgan Chase predicts that Samsung Electronics' HBM revenue will reach $5.6 billion to $9.5 billion from 2024 to 2025, a significant increase from last year's $1.9 billion. With the increase in HBM chip-level density and higher height mix ratio, there is a reasonable upside risk.

When will DRAM Profit Margin Approach HBM

According to JPMorgan Chase's estimate, HBM's operating profit margin (OPM) exceeded 40% this year, with further improvement potential as process yields increase. With the momentum of average selling price (ASP) growth for DRAM slightly stronger than initially expected, it is anticipated that by the end of the year, the profit margin for ordinary DRAM may be similar to or even higher than HBM.

DRAM Upgrade Cycle and NAND Price Trends

Investors are also concerned about whether the DRAM upward cycle can continue beyond 2025. JPMorgan Chase believes that as long as the bit growth rate of ordinary DRAM continues to grow at a low to mid-single-digit percentage in the next two years, the duration of the upward cycle may be longer than usual.

JPMorgan Chase stated that the recent increase in NAND prices is different from DRAM, as the increase in NAND prices seems to be more influenced by supply control rather than demand-side drivers. Although it is expected that the utilization rate will increase from the second quarter of 2024, this is mainly due to memory manufacturers' inventory accumulation. The visibility of price increases is relatively low unless enterprise servers recover earlier than expected.

Capital Expenditure Update

The research report shows that market expectations for capital expenditures have improved since the beginning of the year, as the DRAM industry enters an upward cycle.

JPMorgan Chase expects that due to higher wafer fab equipment purchases compared to infrastructure capital expenditures, there is an upward risk in the current assumption for memory capital expenditures (estimated at 31 trillion Korean won for the 24th fiscal year).

Potential Impact of US Chip Legislation

According to local news reports, Samsung Electronics' wafer fab may receive over $6 billion in tax breaks under the chip legislation, to be used for investments in the Taylor City wafer fab. Samsung Electronics has invested $17 billion since 2021.

JPMorgan Chase believes that this potential tax incentive accounts for approximately 35% of the total investment, higher than TSMC's tax incentive at the Arizona wafer fab ($5 billion, accounting for 13% of the total investment).

Outlook for OLED Business and Mobile Business

JPMorgan Chase also mentioned in the research report that the momentum of flexible OLED construction has weakened compared to last year after a soft seasonal period for key customers. Due to unfavorable mix ratios (relatively more rigid than flexible), the overall profit impact is unfavorable for the first half of 2024.

JPMorgan Chase predicts that despite a decline in smartphone sales (expected to decrease in the mid-single-digit percentage), the profitability of the MX department will remain stable due to ASP increases and improved mix ratios (mainly due to the increased sales mix of AI phones).

Valuation Discount Trends and Industry Comparisons

Data shows that the valuation gap between Samsung Electronics and SK Hynix has widened to a 36% discount, while Micron's current trading price is about 2.2 times the future 12-month P/B ratio, significantly higher than Samsung Electronics' 1.1 times P/B ratio. JPMorgan Chase believes that this undervaluation is mainly due to the market's low expectations for Samsung Electronics' HBM progress. JPMorgan Chase finally stated that the narrowing gap between HBM execution progress and DRAM profit margins compared to peers is a key prerequisite for Samsung Electronics' stock price outperforming its peers. With the expected ordinary DRAM profit margin of Samsung Electronics possibly matching or even exceeding HBM by the end of the year, stocks may react more positively as the market narrative shifts from "AI memory" to "overall memory cycle recovery."