Company Reports

No-moat SK Hynix’s first-quarter results improved significantly as memory prices continued to recover. Revenue increased 9.9% sequentially and more than doubled from the previous year, and gross margin and operating margin improved from 19.7% and 3.1%, respectively, to 38.6% and 23.2%. The company explained that the average selling price, or ASP, for DRAM increased by more than 20% and NAND by more than 30% sequentially. This was driven by 1) an improving product mix due to the robust demand for high-end memories for artificial intelligence, or AI, servers; 2) low seasonality for conventional memory; and 3) a tightening supply/demand balance as memory suppliers reduced capacity utilization. However, despite the strong results, the reported numbers were largely in line with our expectations, as Micron has already reported high-teens ASP growth for DRAM and over 30% ASP growth for NAND in the February quarter. Gross margin and operating margin were above our numbers and the PitchBook consensus, but the difference was due to the reversal of inventory valuation loss.

Following Samsung Electronics’ December quarter earnings call, we reiterate our view that memory prices will continue to rise through 2024. Major memory suppliers significantly reduced capital spending last year to protect their cash flows, and while they plan to increase spending this year from a low base, most will be allocated to high-end products such as DDR5 and HBM3/HBM3E, which consume more wafers. As a result, we forecast that industrywide supply bit growth will be limited amid a solid recovery in memory demand this year, and we expect memory prices to continue to rise in 2024 due to the tight supply. Based on the updated memory outlook, we raise our fair value estimate for Samsung Electronics to KRW 85,000 per share and USD 1,610 per GDR from KRW 80,000 and USD 1,480, and our fair value estimate for SK Hynix to KRW 147,000 per share from KRW 140,000. We believe that Samsung’s shares are slightly undervalued, while SK Hynix's shares are fairly valued.

SK Hynix is the second-largest semiconductor manufacturer in South Korea following Samsung Electronics. The company’s major business is memory and storage used in various electronic devices; smartphones, servers, and PCs are major applications.

Although the December-quarter results exceeded our expectations and the risk of memory oversupply has receded based on the company’s explanation, SK Hynix’s share price dropped 2.9% on the day after the results briefing. We believe that investors may have decided to take profits as the company guided weaker-than-expected DRAM shipments for the March quarter. However, we believe that favorable memory prices will persist through 2024 as suppliers will remain disciplined, resulting in continued tight supply. While we view SK Hynix’s shares as currently fairly valued, a significant decline in the share price could provide an entry opportunity as we believe that solid memory prices will continue for the time being. We maintain our fair value estimate for SK Hynix at KRW 140,000 for now and will review our earnings forecasts after Samsung Electronics’ earnings at the end of January.

Following solid financial results and earnings calls confirming that the memory industry has bottomed out as expected, we have made minor adjustments to our earnings forecasts for South Korean memory suppliers. Our fair value estimate per share for Samsung Electronics is maintained at KRW 80,000, while the fair value per GDR is revised to USD 1,480 from USD 1,560 due to currency movements. Our fair value estimate for SK Hynix is maintained at KRW 140,000 per share. Although inventory levels peaked in mid-2023, they are still at the high levels, especially for NAND. As a result, memory suppliers are expected to continue maintaining lower capacity utilization and to remain cautious about increasing production capacity next year, which should be favorable for memory prices due to limited supply. We believe that the shares of Samsung Electronics are undervalued. SK Hynix’s shares are on the borderline between 3-star and 4-star territory and have about 18%-20% upside to our fair value estimate.

SK Hynix is the second-largest semiconductor manufacturer in South Korea following Samsung Electronics. The company’s major business is memory and storage used in various electronic devices; smartphones, servers, and PCs are major applications.

We have revised our earnings forecasts for two South Korean memory suppliers and raise the fair value estimate for Samsung Electronics to KRW 80,000 per share from KRW 78,000 and to $1,560 per global depositary receipt from $1,470. We've raised the fair value estimate for SK Hynix to KRW 140,000 from KRW 120,000. The reason for the larger increase in SK Hynix’s fair value is that the contribution of increasing investment in artificial intelligence servers is more significant. Excluding the AI server investment, memory supply and demand are largely in line with our expectations, and we maintain our view that memory prices will bottom out by the end of this year and continue to rise through 2024.

SK Hynix is the second-largest semiconductor manufacturer in South Korea following Samsung Electronics. The company’s major business is memory and storage used in various electronic devices; smartphones, servers, and PCs are major applications.

The March-quarter earnings results of South Korean memory suppliers, Samsung Electronics and SK Hynix, were largely in line with our expectations, supporting our view that memory prices will bottom out in the second half of this year and then rise throughout 2024.

SK Hynix is the second-largest semiconductor manufacturer in South Korea following Samsung Electronics. The company’s major business is memory and storage used in various electronic devices; smartphones, servers, and PCs are major applications.

Although Samsung Electronics’ preliminary March quarter numbers were slightly below our forecasts and the PitchBook consensus, there were no major surprises, given Micron Technology’s February quarter results reported last month, which showed an operating loss due to the severe memory price erosion and inventory write-downs. We do not expect Samsung’s guidance itself to have a significant impact on memory stocks, but based on our latest memory price forecasts, we lower our 2023 and 2024 operating income forecasts for Samsung to KRW 11.5 trillion and KRW 33 trillion—from KRW 16.5 trillion and KRW 40 trillion; and for SK Hynix, we revise them to KRW 9.45 trillion loss and KRW 3.2 trillion profit—from KRW 6.4 trillion loss and KRW 4.25 trillion profit, respectively. While we expect suppliers to suffer from oversupply throughout 2023 due to high inventory levels, we think a more severe undersupply will occur in 2024 when demand recovers due to limited capacity expansion in 2023. As a result, our earnings forecasts from 2025 to 2027 remain largely unchanged. Therefore, we maintain our fair value estimates of KRW 120,000 for SK Hynix and KRW 72,000 for Samsung Electronics (adjusted to USD 1,380 per GDR due to currency movements).

SK Hynix is the second-largest semiconductor manufacturer in South Korea following Samsung Electronics. The company’s major business is memory and storage used in various electronic devices; smartphones, servers, and PCs are major applications.

After updating our earnings forecasts, we revise our fair value estimates for SK Hynix to KRW 120,000 from KRW 133,000, and for Samsung Electronics to KRW 72,000 from KRW 73,000 per share and to USD 1,440 from USD 1,300 per U.S. GDR (raised due to currency movement). Memory suppliers are suffering from the largest supply-demand gap since 2008 and inventory levels are still high. As a result, we expect both Samsung Electronics’ memory division and SK Hynix to post operating losses in 2023 which are much lower than our previous forecasts. Meanwhile, we maintain our view that the supply-demand gap for memory will be at its widest in these two quarters and will gradually improve toward the end of the year. As a result, we believe that the price erosion should be at its worst in the December quarter and will be less pronounced in the following quarters. We believe memory suppliers’ shares are undervalued as we expect their operating margin to bottom out in the March quarter and continue to improve until at least mid-2024.

SK Hynix is the second-largest semiconductor manufacturer in South Korea following Samsung Electronics. The company’s major business is memory and storage used in various electronic devices; smartphones, servers, and PCs are major applications.

After incorporating the impact of the prolonged inventory correction, our 2023 earnings forecasts for South Korean memory suppliers are significantly lowered. Contrary to our earlier expectation, the corrections for smartphones and PCs are becoming more severe in the second half, due to the weaker demand triggered by the macroeconomic uncertainties. As a result, the memory oversupply came in a few quarters earlier and much longer than anticipated, making price erosion more serious. Hence, we cut our 2023 operating margin forecasts for Samsung and SK Hynix from 15.9% and 20.4% to 11.8% and 4.5%, respectively. On the other hand, we are encouraged that major memory suppliers are taking action to digest excess inventories and address oversupply. As such, we retain our view that memory’s supply/demand gap will be the largest in the second half of 2022, and so we believe the pace of price declines will slow in the coming quarters, implying suppliers’ shares are currently at the bottom of the cycle. We reduce our fair value estimate for Samsung to KRW 73,000 per share (from KRW 80,000) and USD 1,300 per GDR (from USD 1,540), and for SK Hynix we lower to KRW 133,000, from KRW 142,000. We believe both shares are undervalued.

SK Hynix is the second-largest semiconductor manufacturer in South Korea following Samsung Electronics. The company’s major business is memory and storage used in various electronic devices; smartphones, servers, and PCs are major applications.

SK Hynix is the second-largest semiconductor manufacturer in South Korea following Samsung Electronics. The company’s major business is memory and storage used in various electronic devices; smartphones, servers, and PCs are major applications.

We trim our fair value estimates for two memory suppliers, Samsung Electronics and SK Hynix, based on lower memory shipment assumptions. At the beginning of this year, we had expected tight DRAM supply would continue throughout 2022 and then fall to oversupply for mid-2023 and full-year 2024. However, in our updated forecasts, we expect DRAM oversupply in the second half of this year, coming in a few quarters earlier than we had anticipated, due to the economic slowdown. As a result, DRAM price erosion should accelerate in the next few months, which is the reason we cut our 2022 operating margin assumptions for Samsung and SK Hynix from 20.3% and 32.1% to 17.5% and 26.1%, respectively. Meanwhile, the impact on our midterm forecasts is limited, as we expect memory suppliers to cut capital expenditure and supply to retighten in late 2023, which is also a few quarters earlier than our previous forecasts.

SK Hynix is the second-largest semiconductor manufacturer in South Korea following Samsung Electronics. The company’s major business is memory and storage used in various electronic devices; smartphones, servers, and PCs are major applications.

We revise our fair value estimates for South Korean memory suppliers, Samsung Electronics to KRW 82,000 from KRW 80,000 per share (on the other hand, we trim its fair value estimate per GDR to USD 1,640 from USD 1,700 due to the weaker South Korean won); and SK Hynix to KRW 150,000 from KRW 148,000 per share, to incorporate the weaker South Korean won and our updated view on both DRAM and NAND. While these updates lift our earnings forecasts for 2022 and 2023, we retain our view that memory’s price decline will accelerate from mid-2023, which makes our fair value estimates broadly unchanged. Despite the concern about the weakness of consumer electronics demand due to various uncertainties, which has pushed down memory suppliers’ share prices over the past few months, we maintain our view that memory supply will remain tight throughout this year, due to the solid server demand and supply constraints. Therefore, we believe both shares are currently undervalued. We continue to prefer SK Hynix over Samsung Electronics.