For 2006, the sales growth for NAND/DRAM was +13pct/+22pct. UBS is forecasting supply growth issues with respect to DRAM in 2007. DRAM manufacturers like Nanya Tech, Inotera, and Powerchip, are not value-challenged in today's market, UBS says, because of the strong demand (and probably pricing power) for their chips.

Walkman phone and iPhone are becoming more (NAND) memory intensive, and NAND is facilitating production efficiency improvements due to the way it is structured versus say DRAM. So NAND Flash is still the place to be, but according to UBS, there are production migration issues.

The report gets deep into the supply/demand outlook for DRAM and NAND.

As to their note re SanDisk guidance, they state: "SanDisk's guidance for Q406 included a bit growth range of 50-60% QoQ, with a sequential ASP decline of 15-20% and licence and royalty revenue of US$85-90m. As a result of this outlook, SanDisk now anticipates full-year bit growth of approximately 200% and an ASP decline of 55-60%. We believe the revenue and margin outlook is achievable given that its 300mm Fab 3 has fully migrated to the 70nm process node where MLC is the majority of the bit production on that technology. This 70nm migration should allow SanDisk's product margins to be more resilient than in past quarters.

As to SanDisk operation, they state: "SanDisk expects a 15-20% fall in Q406 card ASPs versus SEC's mid-single-digit decline guidance for component NAND. Both expect weaker demand growth in Q107. SanDisk expects 2007 YoY ASP declines to be more moderate than 2006 ASP drops, partly due to DRAM makers adjusting less DRAM capacity to NAND. SEC has also begun to shift NAND capacity back to DRAM. SanDisk expects 2007 industry demand to be above SEC's 140% YoY demand growth guidance."

And so, UBS opines there are more attractive opportunities in the market prior to the 2H07 industry recovery they are forecasting. Consequently, there is the downgrade from Buy to Neutral.

They conclude: "We believe memory makers' valuations might not begin to factor in the strong H207 profit recovery scenario we are forecasting until Q207. We downgrade our rating for SanDisk from Buy 2 to Neutral 2, and our rating for Infineon from Buy 2 to Reduce 2. We reiterate our Neutral 2 rating on Hynix Semiconductor."

SanDisk Corp [GICS 45, Cara 100]

(SNDK: Yahoo Finance file)
(SNDK: StockChart chart)
(SNDK: Investertech chart)
(SNDK: ADVFN Financial Data)
(SNDK: ADVFN Financial Data)

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Micron Technology [GICS 45, Cara 100]

(MU: Yahoo Finance file)
(MU: StockChart chart)
(MU: Investertech chart)
(MU: ADVFN Financial Data)
(MU: ADVFN Financial Data)

UBS Statement of Risk: The DRAM and NAND flash markets are highly sensitive to fluctuations in demand for PCs, digital still cameras, and wireless handsets, as well as average memory per device, silicon wafer yields, capital spending, and global IT spending. DRAM and NAND flash prices can change rapidly in response to shifts in demand and supply, and are very difficult to predict. DRAM and NAND flash stock prices can be highly volatile, reflecting the volatility in prices and earnings.

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