Earnings Momentum on Rise
The authors are analysts of Shinhan Investment Corp. They can be reached at doyeon@shinhan.com and hyon@shinhan.com, respectively. – Ed.
4Q21 OP reported at KRW4.22tr (+1.1% QoQ)
SK Hynix posted operating profit of KRW4.22tr (+1.1% QoQ) on sales of KRW12.38tr (+4.8% QoQ) for 4Q21, meeting market consensus of KRW4.15tr. Operating profit actually exceeded market expectations when accounting for special bonuses paid out at the year's end. We believe earnings impact of ASP declines was offset by stronger shipments and favorable forex rates.
Earnings momentum on rise; market conditions to rapidly recover
Memory market conditions are improving at a faster pace than anticipated. Chip production was disrupted at Samsung Electronics (NAND, front-end) and Micron Technology (memory, back-end) fabs in Xian, China for about a month due to COVID-19 lockdowns. This likely helped to deplete chip inventories, leading to an earlier-than-expected market recovery. DRAM and NAND prices are now forecast to record an upturn in 2Q22.
SK Hynix's 12MF EPS consensus recently started to rise, with quarterly earnings expected to improve from 2Q22 after bottoming out in 1Q22. For full-year 2022, we forecast sales at KRW59.7tr (+38.9% YoY) and operating profit at KRW20.2tr (+63.2% YoY). Our forecasts now reflect earnings expectations for Solidigm, the NAND operations acquired from Intel, with sales projected at KRW6.0tr and operating profit at KRW1.0tr for 2022.
Increasing focus on shareholder return to drive fundamental gains
SK Hynix announced its shareholder return policy for 2022-2024 during the 4Q21 earnings call, stating plans to use 50% of free cash flows over the three-year period to pay out dividends. Fixed dividends will be raised by 20% to KRW1,200 per share, with payments spread out evenly each quarter starting from 1Q22. We believe increasing focus on shareholder return at memory chipmakers, including SK Hynix, will ultimately lead to improvement in fundamentals. Concentration on profitability over market share should drive improvement in ROE and valuation multiples going forward.
SK Hynix shares declined amid recent correction in the broader stock market, retracing all gains made during the previous liquidity rally. However, we believe further correction is unlikely given the start of an uptrend in 12MF EPS consensus. We expect the shares to bounce back from short-term correction and stage another sharp rally on earnings momentum.