M IdeaAsia Technology | Asia PacificMemory – We Doubt This Time Will Be DifferentMorgan Stanley Asia Limited+Shawn KimEquity Analyst Shawn.Kim@morganstanley.com +852 3963-1005 Duan LiuResearch Associate Duan.Liu@morganstanley.com +852 2239-7357 Jia ZhangResearch Associate Jia.L.Zhang@morganstanley.com +852 2848-7291 Morgan Stanley appreciates your support in the 2024 Institutional Investor All-Asia Research Team Survey. Request your ballot here. S. Korea TechnologyAsia PacificIndustry ViewAttractiveStocks lead pricing, which leads earnings. Bull markets for memory climb a wall of worry, but that’s the rhythm of memory stocks. What’s the next thing to worry about? Focus on things that we believe will never change – the cycle and how people react. A breather needed – it's not the end of the world. Sell-off periods during cycle upturns are normal and have historically often turned out to provide valuable entry points for memory stocks. Supply and demand dynamics are tailwinds now, in our view, 4Q is backward-looking and rising production is good news ahead of quarterly double-digit price hikes in memory. Price matters most – not production. We believe the market may be overly fixated on the belief that higher production raises the likelihood of a memory recession. Instead we believe we need to focus on the big AI/HBM wave across the tech sector. Higher production of advanced 1a/bnm DRAM is needed for companies to meet rapidly surging HBM demand from 2H24 – this is logical, rational and to be expected, in our view. We believe stock price movements are highly correlated with the YoY rate of change in memory pricing (not utilization), which is accelerating on higher output ( Exhibit 3 ). Furthermore, DDR4 production restarts are shifting to DDR5, resulting in lower total wafer capacity compared to 2022. This is what a memory cycle recovery is supposed to look like, in our view. Recovery gaining momentum in 2024. Earnings do not lead the recovery; it is multiples that rise first. Cycles are largely supply-driven, unless there is an unexpected demand shock (not de-stocking or seasonal weakness). AI is still a key driver generating outsized earnings, and we expect margins to accelerate the most, fueled by hyper growth HBM, a better cyclical backdrop and 'At-Home-AI' giving another boost to increased TAM this year. We are past the ‘easy money’ stage of the rally but still see 29%-57% upside to fair value. But we think the real story is the earnings growth outlook rather than current stock valuations. We believe the memory cycle has recovered from the 2Q23 lows and is well set up for 2024. Our primary concern is on the timing of an eventual YoY peak in the cycle entering 2H24 where it becomes 'sell the good news' and stocks respond negatively to positive events seen as marking a peak/inflection. We are clearly not there yet,...
