* DRAM contract prices continue to remain flat

 - DRAM contract prices continue to remain unchanged as overall DRAM demand remains solid despite the slower seasonality

DRAMeXchange released 1H Mar DRAM contract prices which remained unchanged from 2H Feb as overall DRAM demand remained solid despite the slower seasonality. Both DDR2 and DDR3 contract prices remained flat at USD2.31and USD2.50 respectively. According to DRAMeXchange, the reasons for the flattish contract prices are 1) overall DRAM supply especially for DDR3 products remain tight due to inventory restocking demand, and 2) most DRAM makers agreed to stay with the current pricing due to increasing DRAM cost pressure felt at PC OEMs. We believe both the latest pricing and DRAMeXchange comments support our view that DRAM prices will remain stable during 1H10 mainly due to 1) ongoing supply constraint issues (e.g. delay of new immersion tool installation, loss of productivity gains during process migration period) that are yet to be resolved, and 2) increasing demand for DDR3 memory products from PC makers.

- Strong DRAM prices leading to higher DRAM cost per PC could be a risk

Although DRAM supply growth remains limited in the near-term, we still expect supply increase to accelerate in 2H10 as we may see the supply bottleneck issues get resolved. During the 4Q09 earnings release, all major DRAM makers including Samsung, Hynix, Nanya and Inotera echoed low DRAM shipments growth in 1H10 but a significant improvement in 2H10, which is in line with our view. We believe that with DRAM cost per PC now above 12% level, DRAM prices could become vulnerable to increasing DRAM supply. The latest DDR3 contract price (USD2.5) implies DRAM cost per PC of 12.4% vs. 3% at the beginning of 2009. However, 12.4% is still within the historical range of 3-14%.

- We remain positive on Samsung and Hynix

We maintain BUY on Samsung Electronics and Hynix as we remain long-term positive on the overall memory industry. Samsung remains our top pick in the sector for following reasons. 1) The company is one of the major beneficiaries of IFRS accounting which starts from Q1. 2) Its valuation is more attractive versus its peers. 3) We expect Samsung to maintain its cost leadership in the sector. 4) Strong DDR3 pricing trend should favor top-tier DRAM names in 1Q10. Our 12-month price target for Samsung is W982,000 using ROIC valuation. Our 12-month price target for Hynix is W29,700 based on 2.2x the 12-month-forward BPS. Key risks are: 1) faster-than-expected memory supply growth, 2) slower-than-expected global demand, and 3) stronger-than-expected KRW appreciation.