Nanya Q4 and FY2021 Results

January 26, 2022

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 95% 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. The link to their Q4 2020 earnings release slides is at the bottom of this post.

DRAM Market Commentary and Q4 and Full Year 2021 Performance

Nanya’s revenue in the fourth quarter declined 10.2% sequentially, with bits down mid-single digits% and ASPs down low-single digits%. The company hasn’t released a balance sheet yet, so I don’t know how much inventory played into this revenue decline. Clearly demand softened some. Gross margin increased 20 bps from last quarter, so the company reduced costs better than low-single-digits%, which was how much pricing declined. The flattening this quarter is a lagging indicator of the DRAM spot market, which was in gradual decline in the middle of 2021 and has been strengthening for the last two months. Nanya sells a high percentage of their output to PC and consumer customers, so the spot market is a strong preview into their ASPs. For the full year, revenue increased 40% and gross margin rose 1760 bps. Bit shipments for the full year were flat from 2020. This means Nanya lost market share, because the overall DRAM market grew bits in the low-to-mid 20% range for the full year. Nanya losing more share is not surprising because they are not advancing their technology as fast as the big three players.

Bit Shipments and Capital Expenditures

As mentioned above, bit shipments in the fourth quarter were down mid-single-digits percent sequentially and flat for the full year. Nanya is forecasting their bit shipments in 2022 to also be flat, thus they will again lose market share as the overall DRAM market will grow bits around 20%. This will not be the case in 2023. Following three years of low capital expenditures (2019 to 2021), Nanya plans to spend NT$ 28B in 2022, higher than the NT$ 20.4B in 2018 at the height of the last DRAM upturn. The company plans to start small volume production of their first 10nm-class product in Q3-22. This, plus the capex plan for 2022, means their 10nm production will ramp in early 2023, leading to big growth starting about a year from now. Nanya will break ground on their new fab in the second half of this year, which is again a slip from what was said last quarter when the company said groundbreaking would be in the first quarter of 2022. Bits from the new fab won’t be seen on the market until at least 2024.

Q1 and Full Year 2022 Market Outlook

The company says demand from all segments (cloud, smartphone, PC, and consumer) remain healthy. The component shortages they said last quarter were impacting many markets will be alleviated in the second half of 2022. The conversion from DDR4 to DDR5 and new CPUs for data centers will increase throughout this year, spurring demand. The company said they are “cautiously optimistic” for the DRAM market in 2022. They said inventories at both customers and DRAM suppliers remain low. To the degree this is true it is positive for the DRAM market. If demand starts to exceed supply in 2022, prices will rise rapidly because there is no buffer in the system to fulfill the extra demand. And if supply exceeds demand there is room for the DRAM makers to increase their inventories rather than sell into a weakening market. Nanya caveated their optimism for 2022 by saying that inflation, geopolitical tensions, and DRAM supplier capex plan changes could also negatively affect the supply-demand balance.
• Server Market: Datacenter continuously driving demand growth, components shortage issue lingering, expect easing in 2H’22, and DDR5 and new CPU start shipment
• Mobile Market: 2022 shipment growth led by both 5G and 4G segments, with 5G leading in flagship, and 4G driven by emerging markets, and average DRAM content growing
• PC Market: NB demand remaining healthy, component shortages and international shipping continue to impact delivery, expect easing in 2H’22
• Consumer Market: Positive outlook for networking, wearables, smart speaker, SSD and TV, VR and new game consoles. Automotive chip shortage expect eased by year end

Summary

Last quarter my biggest question with Nanya was how they knew that Q4 marked a short-term correction in the DRAM market. The company didn’t reference that prediction in this release, but their statement about cautious optimism for 2022 indicates they believe the correction was indeed short-term. Nanya makes 3-4% of the total DRAM bits in the world and this share declined in 2021 and will drop again in 2022. For the DRAM market this is good news but given their small size it doesn’t matter that much. The company includes a five-year graph of revenue, income, gross margin and operating margin in their earnings presentation which I really like. I base my investing in Micron on the duration of the DRAM market cycles, and to a lesser degree the amplitude. But COVID has brought my thesis into question because of how it shocked other factors affecting supply and demand, such as supply chain disruptions and shifts in demand between sectors. But looking at just the duration and amplitude of the cycle today, we have another four quarters or so in the DRAM upturn, with headroom for gross margins to go higher (they peaked 1000 bps above today’s level in the 2017 – 2018 upturn. But as I said, COVID has brought down my confidence in this timing model. Nanya’s overall commentary in this report is positive for the DRAM market. They said demand continues to be healthy, inventory is low, the softness seen in pricing in the middle of 2021 seems to be passing, and Nanya won’t add bits to the market in 2022.

Link to earnings presentation https://www.nanya.com/Content/InvestorCalendar/486_Nanya_4Q_…

-S Hughes (long MU)

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