DRAM Supply Shortage Expected from End-1Q20
The authors are analysts of Shinhan Investment Corp. They can be reached at doyeon@shinhan.com and sungjun.na@shinhan.com, respectively. -- Ed.
1Q20 operating profit forecast at KRW511.7bn (+116.8% QoQ)
For 1Q20, we forecast SK Hynix to report operating profit of KRW511.7bn (+116.8% QoQ) on sales of KRW6.78tr (-2.1% QoQ). DRAM and NAND prices have increased in tandem. DRAM prices may rise at a faster pace on strong server DRAM demand. DRAM will likely be in severe supply shortage in 2Q20.
DRAM supply shortage expected from end-1Q20
As COVID-19 takes a toll, the slowdown in IT hardware demand is inevitable. Demand for smartphones and PCs should decline in the near term, given production disruptions in China shaking up the value chain and demand slowing with COVID-19 spread in developed countries. The price of server DRAM chips should rise sharply for some time on strong demand from servers. With chipmakers reducing supply in the mid-to-long term, prices may move largely in line with our projection.
Earnings are expected to improve sharply from 4Q19 bottom. DRAM and NAND supply shortages should drive up prices from 2Q20.
Earnings to improve from 4Q19 bottom
We have recently seen greater share price volatility. Macroeconomic variables are difficult to predict. Demand forecasts will have to be revised down. However, memory chipmakers are capable of adjusting supply and demand by cutting back on their output. Chipmakers continue to maintain a conservative outlook on demand. We thus believe it will take time before they actually start to increase supply. With supply to remain constricted, the outlook is clearly positive for semiconductor market conditions.
We downgrade our target price for SK Hynix by 7.4% to KRW125,000. Target multiple is lowered from 1.8x to 1.7x to reflect macroeconomic uncertainties.
Our rating is kept at BUY in view of: 1) shortages in DRAM and NAND; 2) uptrend in 12-month forward EPS consensus; and 3) earnings turnaround (2020F EPS +194% YoY).