Semiconductor/equipment

The author is an analyst for Shinhan Securities. He can be reached at ym.ko@shinhan.com -- Ed.

Micron’s earnings release raises expectations for SK Hynix’s decoupling

SK Hynix is likely to have seen operating loss of KRW2.3tr (continued loss QoQ) on sales of KRW6.8tr (+34% QoQ) in 2Q23. Micron Technology’s 2Q results released on June 29 added to expectations that the company would report faster growth in earnings than peers.

First, SK Hynix is expected to have registered higher ASP than Micron thanks to DDR5 and high-bandwidth memory (HBM) chips. As the world’s only producer of 128GB DDR5 and HBM3 chips, the company has been able to limit the decline in prices. DRAM ASP is estimated to have decreased by 8% similar to Micron’s 10%, but DRAM bit growth likely reached 45% compared to Micron’s 10% levels.

Second, SK Hynix should have enjoyed stronger demand. As mentioned by Micron during its 2Q earnings call, the market shows strong demand for HBM3 and fast penetration of DDR5 (market share to exceed DDR4 in 1Q24), which should go to further consolidate confidence in an earlier upturn in the semiconductor cycle. We believe expectations for the industry up-cycle will start to build in earnest.

2023 outlook: DDR5 and HBM to drive faster profit growth vs. peers

For 2023, we forecast sales at KRW27.2tr (-39% YoY) and operating loss at KRW7.8bn (negative swing YoY). Strong competitiveness in high value- added products like DDR5 and HBM chips should help SK Hynix achieve faster improvement in ASP and bit growth than competitors this year.

The market penetration rate of DDR5 is expected to jump from 1% in 4Q22 to 40% in 1H24. The company is also moving ahead with preparations for next-generation 1b nanometer process technology, following the production of 1a nanometer-class chips. Its market leadership in DDR5 will remain intact through 2024.

SK Hynix is currently the only company in the world mass producing HBM3, which is supplied exclusively to NVIDIA for the H100 Tensor Core GPU. Sales of HBM chips are projected to surge 45% YoY in 2023 and 40% YoY in 2024, leading to steep profit growth during the market upturn.

Target price raised based on upward earnings forecast revision

We raise our target price for SK Hynix to KRW150,000, based on 2024F BPS of KRW86,644 and a target PBR of 1.7x. Concerns over share valuations should dissipate, with the upper end of the PBR band raised on three occasions as the earnings season progresses until the end of July (earnings releases by Micron → Samsung Electronics (preliminary) → Samsung (final) and SK Hynix). With SK Hynix expected to enjoy steeper share price gains than peers (decoupling), we believe now is the last chance to accumulate the shares at attractive levels for this market cycle.