Too Much Reliance on SK Hynix
SK Hynix Inc. is expected to see its operating profit account for more than 80 percent of the total of SK Group this year. As the group is becoming more and more dependent on the semiconductor business, it is getting more and more vulnerable as a whole. Market experts say that it is urgent for the group to seek for “post-semiconductor” growth engines as its main businesses, including telecommunications, petrochemical and refining, have flatten out while the semiconductor business is subject to fluctuations.
According to Seoul-based market data provider FnGuide on September 27, the share of SK Hynix’s operating profit in the combined operating profit of SK Group’s three core subsidiaries – SK Hynix, SK Innovation and SK Telecom – is expected to reach 83.5 percent this year. SK Hynix’s operating profit projections stand at 22.28 trillion won (US$20.03 billion), which is much higher than the projections of SK Innovation at 3 trillion won (US$2.69 billion) and SK Telecom at 1.39 trillion won (US$1.25 billion). Although the group’s business portfolio consists of three main pillars, including semiconductor, telecommunications and oil refining and petrochemicals, they have a big difference in performance. An official from the securities industry said, “SK Hynix’s operating profit will take up over 80 percent even when the operating profits of the group’s 100 subsidiaries are combined.”
The gap between SK Hynix and other subsidiaries seems to be growing further. The share of SK Hynix in the combined operating profit of the three major subsidiaries shoot up from 40.7 percent in 2016 to 74.2 percent in 2017. This was largely due to fact that SK Hynix’s operating profit surged from 3.28 trillion won (US$2.95 billion) to 13.72 trillion won (US$12.33 billion) over the same period, but the sluggish performance of the telecommunications and oil refining and petrochemical businesses also helped. The operating profit of SK Innovation stood still from 3.228 trillion won (US$2.9 billion) to 3.234 trillion won (US$2.91 billion) as well as SK Telecom from 1.536 trillion won (US$1.38 billion) to 1.537 trillion won (US$1.381 billion).
The problem is that semiconductor business fluctuations can deal a blow to the whole group. SK Hynix’s main memory chip business is vulnerable to market conditions. Germany’s DRAM chip giant Qimonda and Japan’s Elpida Memory disappeared overnight. The time of China, the biggest semiconductor consumer in the world, turning its back on South Korea is getting close. Chinese President Xi Jinping has ordered to raise the nation’s semiconductor self-sufficiency rate to 70 percent by 2025. Global investment firms, such as Morgan Stanley and Goldman Sachs, claim that the semiconductor industry has already hit the boom.
In short, there is no guarantee that the group would continuously make enough profits. SK Group announced in March a plan to invest 80 trillion won (US$71.91 billion) in the five new industrial sectors in the next three years. A total of 27.5 trillion won (US$24.72 billion) will be injected this year alone, which is 44 percent higher than last year. The group needs a new cash cow other than SK Hynix. Some market experts say that SK Group will sell off some of its affiliates to secure cash.
SK Group is making every effort to seek for post-semiconductor growth drivers. SK Holdings C&C, the holding firm of the group, is strengthening its investment in the biotech and pharmaceutical, shale energy and car sharing services areas. The heart of the investment is biotechnology. SK Holdings C&C acquired U.S.-based contract development and manufacturing organization (CDMO) AMPAC Fine Chemicals for 700 billion won (US$629.21 million) in July. The company bought an Irish plant of multinational pharmaceutical firm Bristol-Myers Squibb (BMS) last year. The biotech sector is forecast to create a considerable amount of added value when combining SK Group’s information and communications technology (ICT) capability and big data. In particular, the group has been paying more attention to SK Biopharmaceuticals, a subsidiary of SK Holdings C&C, after Chey Yoon-chung, the oldest daughter of SK Group chairman Chey Tae-won, joined the firm last year.
The group purchased a 9.5 percent stake in Vietnamese listed conglomerate Masan Group for 530 billion won (US$476.4 million) this month as part of its strategy to grow into a “Southeast Asia insider,” beyond “China insider.” Masan Group’s core business is food and beverage but it is the seventh largest company by market cap in Vietnam. Accordingly, it can have a big help when Vietnam privatizes a Vietnam’s state-run company or push ahead with various mergers and acquisitions. In fact, chairman Chey met Nguyen Xuan Phuc, prime minister of Vietnam, in November last year to pledge to promote close cooperation between the two companies.