The author is an analyst of NH Investment & Securities. He can be reached at hwdoh@nhqv.com. — Ed.
SK Hynix’s earnings decline is expected to continue in 1Q23. Full-fledged supply/demand improvement is anticipated from 2H23 through aggressive supply control efforts, including investment reduction and production cuts across the memory industry.
1Q23E operating loss of W2.7tn
We maintain a Buy rating and TP of W117,000 on SK Hynix. Our TP assumes a COE of 8.3% and three-year (2023~2025) average ROE of 12.0%. We downwardly revise our beta assumption from 1.0 to 0.8 due to the recent narrowing of share price fluctuations for SK Hynix relative to the market.
Sluggishness in IT set sales and data center investment has intensified due to macro deterioration. For 4Q22, we expect DRAM shipments to arrive flat q-q, with ASP to fall 26% q-q, and NAND shipments to slide 3% q-q, with ASP to drop 27% q-q. SK Hynix should report 4Q22 sales of W8.1tn (-26% q-q) and an operating loss of W1.2tn (TTL q-q). Sluggish earnings are expected to continue into 1Q23. With memory price decline set to deepen (1Q23E: DRAM shipments +3% q-q, ASP -23% q-q, NAND shipments +3% q-q, ASP -24% q-q), we expect 1Q23 sales of W6.0tn (-26% q-q) and an operating loss of W2.7tn (RR q-q).
From 2H23, semiconductor supply/demand to improve on reduced investment and supply
A turnaround in the memory market should arrive from 2Q23. Memory makers are actively adjusting production and reducing new capacity investment to respond to falling memory prices. For memory semiconductors, which are general-purpose mass-produced products, even if demand is sluggish, prices can rise and earnings can improve if supply falls short of demand. Even leading companies are expected to see large-scale deficits from 1Q23 and proceed with production cuts and investment reduction.
The effects of reduced supply due to investment cuts should be realized in 2H23, when inventories narrow. Against this backdrop, overall industry shipment growth is forecast to reach only 7% y-y (DRAM basis) in 2023, including inventories. We expect 2023 to mark the first year of y-y decline in terms of production. Helped by lessened supply, earnings at memory semiconductor makers could improve from 2H23. In 2024, when supply shortages are at peak intensity, the recovery in earnings is highly likely to exceed industry expectations.
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