Limited Memory Supply Increase Positive
The author is an analyst of NH Investment & Securities. He can be reached at hwdoh@nhqv.com. -- Ed.
Memory supply-demand improvement is likely to be delayed due to macroeconomic factors. Demand for smartphones and PCs is sluggish. Demand related to data center investment is likely to fall somewhat in 2H22. Supply limitations due to increased manufacturing process difficulties and equipment supply disruptions are favorable for SK Hynix.
Demand for IT products sluggish due to macro impacts
We maintain a Buy rating on SK Hynix but lower our TP from W170,000 to W140,000. The downward adjustment in TP reflects both a trimming of our 2022E~2023F earnings estimates and hike to our risk-free rate assumption in line with interest rate increase. Improvement in memory supply and demand, which was projected to arrive in 2H22, is likely to be delayed until early-2023 due to macro factors such as global interest rate hikes, the Russia-Ukraine war, and lockdowns in China. DRAM price increase is expected from 1Q23.
In May, smartphone sales in China came to 20.6mn units, showing a fifth consecutive month of y-y decline. Responding to sluggish sales, major smartphone makers are cutting back on parts purchases to reduce inventory. Impacted by the fading of non-face-to-face demand, PC shipments have fallen from 4Q21. In 2022, PC sales are forecast to slide 10% y-y. Server demand, which has been sound thus far, is likely to begin slowing from 3Q22, as Google, Meta, and Amazon start to reduce cloud investment due to economic downturn.
Limited memory supply increase positive
Positives for SK Hynix include the continued tight supply-demand situation and its low valuations. Amid the mounting technical challenges in the transition towards the 14nm node, we note the rising number of processes requiring EUV application, which results in problems such as stochastic defects and increased line edge roughness (LER) due to photon shot noise and light blur. As a result, it has become more difficult to control production yield.
New capacity investment is not proceeding smoothly owing to equipment supply issues. Consequently, DRAM supply growth is expected to be held at +17% y-y in 2022 and +18% y-y in 2023. Following its recent share price decline, SK Hynix is now trading at a 2022E P/E of 5.7x and P/B of 0.9x, in line with its 10-year low P/B. Even considering likely delayed improvement in memory supply/demand, we believe that its current valuations are undemanding.