Steep Earnings Improvement Expected from 1Q21
The author is an analyst of Shinhan Investment Corp. He can be reached at doyeon@shinhan.com. -- Ed.
1Q21 OP forecast at KRW1.41tr (+45.7% QoQ)
SK Hynix is expected to post operating profit of KRW1.41tr (+45.7% QoQ) on sales of KRW8.37tr (+5.0% QoQ) for 1Q21, slightly above market expectations of KRW1.35tr. Actual earnings were likely solid, given that current forecasts reflect one-off employee compensation expenses of roughly KRW90bn. For 1Q21, DRAM ASP should come in 7% higher on a QoQ basis.
OP to jump by 163% YoY in 2021 and by 72% YoY in 2022
The biggest driver of earnings growth for SK Hynix is expected to switch from chip demand for mobile devices and PCs through 1Q21 to servers from 2Q21, with growth in server demand still yet to start in earnest. For DRAM (8GB, 2400Mbps), the gap between spot and contract prices has now widened to 44%. Inventory turnover ratios are still low at around 44% of the previous cycle peak. We thus believe earnings will continue to blow past market expectations through 2Q21 and 3Q21. For the full year, operating profit growth should reach up to 163% YoY in 2021 and 72% YoY in 2022.
Intel's new platform launch and the DRAM industry's full-scale shift to DDR5 from 2H21 will likely lead to increases in demand, price premiums and supply constraints, brightening the outlook further for DRAM market conditions. Supply constraints in NAND are also expected to worsen as chipmakers start to adopt double-stack technology in earnest from 2H21.
Recommend accumulating shares during short-term correction
SK Hynix shares have corrected alongside the broader market in recent trading. We believe the short-term correction has opened up a good opportunity to accumulate shares in the chipmaker. The company’s earnings are likely to rise at a faster rate than the increase in KOSPI earnings and interest rates. Historical data shows that past market rallies led by the semiconductor sector and chipmakers such as SK Hynix coincide with major periods of rising interest rates (2013-2014 and 2016-2017).
During economic recovery periods, memory makers typically see limited increase in overall costs with fixed costs accounting for most of the total. Memory chip sales, on the other hand, tend to sharply increase on the rise in ASP levels. As a result, the memory sector normally reports faster growth in earnings than the broader market during periods of economic recovery.
Key investment points for SK Hynix are: 1) forecasts for steep earnings improvement from 1Q21; 2) expectations for record-high earnings in 2022; and 3) potential re-rating upon an upturn in NAND market conditions, backed by the acquisition of Intel’s NAND flash business. We recommend accumulating shares in SK Hynix during market fluctuations.