We expect the global memory industry’s up-cycle, which started in 2H2016, to continue in 2017. This will be mainly driven by rising memory prices due to imbalance between supply and demand in DRAM and NAND segments.

We expect the global memory industry’s up-cycle, which started in 2H2016, to continue in 2017. This will be mainly driven by rising memory prices due to imbalance between supply and demand in DRAM and NAND segments.

DRAM market experiences supply shortages due to faster-than-expected rise in demand while bit supply growth sees a structural slow down. On the NAND side, adoption of solid state drive (SSD) continues to drive demand despite the industry’s capacity growth being affected by the ongoing conversion to 3D-NAND from planar NAND.

Tight supply should continue to drive DRAM and NAND prices higher in 1H2017 and keep them elevated throughout the year. The current oligopoly and slowing technology-driven supply growth should keep supply under control, and limit downward pressure for memory prices. Hence, industry players are poised to record cyclical peak profitability in 2017, which would propel continuous share price rerating.

We think Samsung Electronics (005930 KS) and Micron Technology (MU US) are the main beneficiaries from this upcycle. Micron Technology is our top pick as it has the highest leverage to rising DRAM prices among the oligopolists as sales for this segment contributed over 60% of FY16 revenue while lower-than-peers margin and a low base provide the highest earning growth potential compared to peers. Consensus target price of US$29.26 implies the stock has 23% upside potential.

Samsung Electronics is the leader in technology, market share and profitability. Its FY17F earning prospects are buoyed by rising DRAM prices, better product mix from higher priced 3D-NAND and adoption of OLED screen by iPhone8. The stock has a 22% upside potential based on consensus target price of KRW2,317,714.