Memory sector:The best case scenario for Hynix

Bloomberg (14 September 2017) has reported that financial support from Apple to provideUSD3bn in capital helped convince Toshiba to sign a memorandum of understanding witha Bain-led consortium (also including SK Hynix, Dell, Kingston, Seagate and Japanesecompanies), memorializing the parties’ intent to negotiate an agreement for the sale ofToshiba’s memory unit by the end of this month although Toshiba reportedly is still notruling out other bidders. The MOU, if true as reported, would signal the first time Toshibahas executed any agreement with a potential buyer, swinging the deal away from thepreviously favoured bidding group that includes Western Digital (WDC). According to thereport, the offer is valued at USD22bn including investment in infrastructure. In responseto WDC’s argument that any deal would need its consent, the report said that Bain notedit would honour all the contractual terms of the WDC joint venture.

    Potential for NAND market consolidation. We would see this deal, should it happen, asa positive catalyst for NAND makers longer term. With a collaboration structure betweenToshiba Memory and the Bain-led consortium, the industry consolidation would likelyease competition with the number of players to be reduced from five to four. This wouldlikely improve the negotiating positions of the remaining players with set makers. Toshibahad a 17% share and Hynix a 10% share of the NAND market in 2Q17.

    Best case scenario for Hynix. More importantly, we would view such a deal as the bestcase scenario for Hynix as it would enable more in-depth, diverse collaborations withToshiba Memory in 3D NAND and other new memory development, such as magneticrandom access memory (MRAM). Also, the inclusion of major NAND consumers in thisconsortium, such as Apple, Dell, Kingston and Seagate, would improve confidence inHynix being able to easily secure customers once it develops products.

    Reiterate Buy ratings on SK Hynix and Samsung Electronics as we think thepotential NAND industry consolidation is positive for their NAND businesses. With theirROEs rising, we see both Samsung’s and SK Hynix’s valuations as attractive. Samsungis trading at a 6.9x 2018e PE and 1.3x 2018e PB with an ROE of 20% while SK Hynix istrading at 1.3x 2018e PB with an ROE of 28%. Our unchanged target prices areKRW2.85m for Samsung and KRW90,000 for Hynix.