Shares Appear to Have Priced in Worst-case Scenario

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

 

3Q21 OP forecast at KRW4.1tr (+52.2% QoQ)

We now expect SK Hynix to post operating profit of KRW4.1tr (+52.2% QoQ) on sales of KRW11.84tr (+14.7% QoQ) for 3Q21. Strong earnings growth was likely driven by ASP hikes for both DRAM (+8% QoQ) and NAND (+8% QoQ).

Market expectations for 3Q21 earnings have been adjusted downward. Adding to concerns over a memory market peak after 3Q21, uncertainties in 4Q21 and 1Q22 earnings have increased due to disruptions in the IT supply chain. DRAM and NAND prices are projected to drop by 4% and 2% QoQ, respectively, in 4Q21 and by 5% and 4% QoQ in 1Q22.

Pandemic-triggered cycle completely different from typical cycles

The current cycle is different compared with the typical down-cycle of 2H18 in three aspects: 1) inventory adjustments at clients (IT supply chain disruptions in 2H21 vs. demand drop in 2H18); 2) limited supply burden (global DRAM equipment order placements of 60K/month in 1H21 vs. 180K/month in 1H18); and 3) fair inventory levels maintained by clients (8-10 weeks in 2H21 vs. 12-16 weeks in 2H18). It is reasonable to view current market correction as an exception, triggered by the COVID-19 pandemic.

In this cycle, we expect to see two short corrections and three mini up-cycles from 2H19 onward. Uncertainties may linger through 1Q22, but memory market conditions should recover from 2Q22. We continue to focus on the recent slowdown in the spread of COVID-19 in Vietnam and Malaysia, and the slowing pace of decline in DRAM spot prices.

For full-year 2022, SK Hynix's sales are forecast at KRW53.23tr (+26.5% YoY) and operating profit at KRW19.71tr (+67.4% YoY).

Focus on valuation now and momentum from 4Q21

SK Hynix shares appear to have priced in the worst-case scenario to a considerable extent. We expect the shares, currently trading in the very low end of the valuation band, to recover from excessive corrections in the short term (valuation call), and then rally alongside increasing orders from clients (momentum call). Momentum should pick up in 4Q21 with the easing of supply chain disruptions and depletion of inventories at client companies.

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