Semiconductor Market Uptrend Intact

The authors are analysts of Shinhan Investment Corp. They can be reached at doyeon@shinhan.com and sungjun.na@shinhan.com, respectively. -- Ed.

 

1Q20 results exceed market expectations

SK Hynix posted operating profit of KRW800.3bn (+239.1% QoQ) on sales of KRW7.2tr (+3.9% QoQ) for 1Q20, topping the FnGuide consensus of KRW509.1bn by a wide margin. Excluding one-off gains of KRW180bn from the reversal of valuation loss related to NAND inventory assets and KRW70bn from the rise in USD/KRW exchange rate, we believe operating profit came in just slightly above expectations. Earnings improvement was driven by the increase in DRAM (+3% QoQ) and NAND (+7% QoQ) ASP levels and cost reduction from process migration.

2Q20 OP forecast at KRW1.51tr (+89% QoQ)

For 2Q20, we forecast sales at KRW8.14tr (+13.1% QoQ) and operating profit at KRW1.51tr (+89% QoQ), with a 11% QoQ increase in DRAM ASP levels expected to drive further earnings improvement. Favorable forex rate trends should also have a positive impact on earnings.

At end-1Q20, inventory fell below normal levels for DRAM and dropped to normal levels for NAND. We expect the downtrend to continue through 2Q20. Meanwhile, client inventory levels are estimated to have increased slightly on slowing smartphone demand amid the COVID-19 pandemic. As a result, DRAM shipments could weaken in 2Q20 and have an impact on ASP levels in 3Q20.

Semiconductor market uptrend intact, albeit at a temporarily slower pace

DRAM makers are unlikely to adjust their profit target despite the COVID-19 pandemic, although it may take longer than previously expected to reach the earnings peak due to the temporary slowdown in demand. With the semiconductor market to remain on an uptrend, stocks should continue to rally on improvement in both BPS and PBR.

SK Hynix remains attractive with shares trading around the mid-lower end of the up-cycle valuation band at a 12-month forward PBR of 1.04x. We expect the share price rally to resume upon confirmation of the extent of the demand slowdown in 2Q20.

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