October 11, 2023
About the Company
Nanya is a small Taiwanese DRAM manufacturer. They produce DRAM on trailing-edge process nodes (licensed from Micron) but are developing their own more advanced, technology. Nanya has about a 3% share of the DRAM market, a distant fifth, behind Samsung, Hynix, and Micron. The top three companies control a combined 94% of the DRAM market.
I don’t own any shares of Nanya and would not buy any, because they lack the scale and the technology to be competitive in DRAM. I keep an eye on their quarterly releases as a data point on the DRAM market.
Market Commentary and Q1 2023 Performance
The PC segment, the dominant market for Nanya’s products, entered oversupply first, so it should be the first segment to emerge. Therefore, Nanya is a leading indicator for the DRAM market. Net sales were up by 10.1% Q-o-Q, following a 9.4% sequential rise last quarter. This happened because shipments increased high-teens % (up mid-teens % last quarter), more than offsetting the high-single digits % reduction in ASPs. DRAM demand has returned. For the last seven quarters, going back from Q2-23 (from newest to oldest), ASP declines have been: high-single digits, mid-single digits, mid-single digits, high single digits %, mid-20s%, low-20s%, mid-single-digits %, mid-single-digits %. Gross margin was (25.2)%, more than twice as negative as last quarter. This was caused by idle charges, caused by Nanya running their factories below capacity in response to the weak market. I think the market has strengthened in the last ninety days and Nanya accepted lower pricing than they otherwise would in order to move inventory and generate cash. For the third quarter in a row the company didn’t include their gross margin graph.
Bit Shipments and Capital Expenditures
After last quarter, when the company reduced their capital expenditures forecast for the year from NT$18.5B to NT$15.0B, they did not announce a further reduction. Management also stated, as they did last quarter, that WFE will be approximately half of this total. Annual bit shipments will be down mid-single digits % in 2023. Last quarter, the company said they would “dynamically reduce” their output by up to 20%. In this announcement they stuck with that range of output reduction. By the end of 2023, Nanya’s bit production will be down to the same level it was at in 2020.
2023 Market Outlook
The company expects “some improvement” in demand in the fourth quarter. Ninety days ago they forecasted “moderate to marginal” improvement in demand in the second half of calendar 2023. It is unusual for me to find anything useful in Nanya’s comments about future trends. Only the information they provide on the current state of markets is of value.
- · Server Market: Server market will show “quarterly improvement from Q4.” This is another way of saying the fourth quarter will be the bottom for the server segment, which is the last segment to turn up.
- · Mobile Market: The Chinese smartphone market is expected to rebound in Q4. They are saying the bottom has passed for mobile demand.
- · PC Market: They said nothing of value.
- · Consumer Market: Demand for consumer, networking, industrial, and automotive “remains stable.” This is a diverse set of segments to lump together into a single statement.
Analyst Call
Prepared Remarks
· Their inventory has started to decrease, and overall demand is improving gradually. Nanya’s product level is now below the level of market demand.
Analyst Q&A
- · They did do an inventory write-down in the third quarter. Most of this write-down was on DDR4 product.
- · They expect ASPs to gradually improve in Q4. DDR5 will improve “substantially” and DDR4 will see “some improvement.”
- · Their wafer capacity is around 65,000 wafer starts per month (WSPM). They are starting wafers 20% below this capacity right now.
- · The CEO stopped short of saying their blended ASP would be up in Q4, leaving it at “there is a good opportunity” for this to happen.
- · The largest segment of their sales is into the consumer space.
- · Pricing has turned up for DDR5 products being sold into the server and PC segments. DDR4 is getting better but has not yet turned up. DDR3 is showing “marginal improvement.”
- · When asked to predict when the up cycle will happen, he declined to make a prediction. This is good, because in the past he has been terrible at seeing the future. His commentary did give insight into his mindset. He commented on all the risks there are in the market, especially geopolitical. I think this is the mindset of a man who weighs the downside heavily vs. what might go right. This is not surprising because Nanya is mostly along for the ride in the DRAM market.
Summary
The CEO predicted blended ASPs were “likely” to have turned positive in the third quarters, a forecast that turned out to be wrong. He was correct that bit shipments would grow again. The latter was not a bold statement given that shipments grew in Q2. The company’s commentary on the current state of the market is useful even if their forecasts are not. Nanya took a large inventory write-down this quarter, resulting in a sharp drop in gross margin. With the market recovering now, I expect gross margin to improve going forward as the upturn is underway.
-S. Hughes (cyclical long MU)