Memory sector:Flat NAND price while DRAM stabilization intact

　　May NAND price flat m-o-m, in line with our bullish view. DRAMeXchangereleased the May NAND contract price, which stayed flat m-o-m (128Gb MLC) atUSD3.51 due to conservative output growth in 2D NAND flash overall in the middle of3D conversion by most of NAND makers. In addition, more allocation to TLC (3 bitper cell) given growing demand from solid state disk and mobile applicationsupported the strong MLC NAND price.

　　NAND shortage ahead. We see the NAND market moving into shortage and pricesto show an upward trend going forward. Price hikes will come from: 1) surgingdemand on the back of content growth in smartphones and 3D NAND based solidstable disk (SSD) from HDD to SSD transition in enterprise storage, 2) under-utilizingcapacity amid a 2D to 3D conversion delay, reaching around 120k wpm (9% of globalcapacity) on our estimates, 3) limited tech migration at 2D technology.

　　May PC DRAM price declined 4% m-o-m. DRAMeXchange said the May PC DRAMcontract price declined 4% m-o-m (4GB DDR3 module) to USD12.5, in line with ourforecast, due to weak demand. DRAMeXchange also expects price stabilization dueto capacity allocation to server and mobile.

　　DRAM price stabilization intact. We expect to see the decline in PC DRAM pricesslowing (-5% q-o-q in 3Q versus -12% in 2Q), with the DRAM industry staging aturnaround from 3Q. We see PC DRAM price stabilising as a result of aggressivecapacity allocation to mobile/graphic from PC DRAM at Korean DRAM makers as 1)PC DRAM margins came down sharply in 1Q and are now well below mobile/serverDRAM margins and 2) a surge in mobile DRAM demand due to DRAM contentincreases in upcoming flagship smartphone models.

　　Reiterate Buy for Samsung (PB-based TP KRW1.9m) and SK Hynix (PB-basedTP KRW41K). As DRAM makers have been actively seeking to defend against PCDRAM price declines through further capex cuts and slower migration, we think thecycle will bottom in 2Q. Also, both Samsung and Hynix are beneficiaries of strongNAND prices. Samsung’s dominance in 3D NAND should help it benefit from 3DNAND conversion in enterprise storage. The valuation is attractive for both stocks:Samsung trades at 9.0x 2016e PE (or 6.1x ex. end-2016e net), and 1.0x 2016e PBwith an ROE of 11%, while SK Hynix trades at 0.9x 2016e PB with an ROE of 9%.