Memory sector:Early signs of price stabilization emerges

　　April PC DRAM declined 4% m-o-m, in line with expectations. DRAMeXchangeannounced that April PC DRAM contract price declined 4% m-o-m (4GB DDR3module) to USD13.0 due to: 1) supply increases as DRAM suppliers continueupgrading process technology and 2) weak PC demand persisting.

　　…however, early signs of price stabilization emerged. PC DRAM price is likely tocontinue to decline, but it should be at a slower pace. In addition, there are increasingquarterly contracts made among DRAM makers and PC-OEMs. In our view, this can beinterpreted as there is more positive potential for PC DRAM trend going forward. We see1) PC DRAM price reaching to cash cost of 30nm technology at USD12.5 (4GB DDR3module); 2) more capacity allocation to 3D NAND; 3) further decline in DRAM capex by18% y-o-y in 2016e and 4) seasonal demand recovery may indicate that PC DRAM pricecould show a better trend in 2H16. We assume PC DRAM price will fall only 5% q-o-q in3Q after 12% q-o-q decline in 2Q.

　　Focus on DRAM cycle bottoming in 2Q. As DRAM makers are actively defendingPC DRAM price declines through further capex cuts and slower migration, we thinkthe cycle will bottom in 2Qe. Also, we think more allocation to mobile DRAM and 3DNAND underscores the strong willingness of DRAM makers’ endeavours; this shouldstart to impact the pricing trend from end-2Qe. Moreover, the capex cut is likely tolead to better pricing in 2017e. On the demand side, a DRAM costs decline to 3.5%of the bill of materials of notebook PC, which is a historical low range from the recentpeak of 9% in 4Q14, should drive up end demand returns to a normal trend.

　　Reiterate Buy for Samsung (005930 KS, TP KRW1.9m, 52% implied upside) andSK Hynix (000660 KS, TP KRW41k, 47.2% implied upside). We think the DRAMcycle is more important for the share price now as the market seems to be well awareof the falling PC DRAM price and it is mostly priced into the shares. Therefore, welike both Samsung Electronics and SK Hynix. For Samsung, 3D NAND should play akey role for market share increase. 48 stacks upgrade would help to show bettermargin 2H16e. We believe valuation is attractive for both stocks. Samsung trades at8.7x 2016e PE (or 5.8 ex. end-2016e net), and 1.0x 2016e PB with ROE of 11%.

　　SK Hynix is trading at 0.9x 2016e PB with an ROE of 9%.