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Positive factors emerging

Key changes/developments

1) Earlier-than-expected supply/demand normalization and sharp graphics DRAM pickup

• DRAM and NAND: TrendForce forecasts excess demand to begin to increase in 3Q23 amid output cuts.

• The market intelligence firm raised its DRAM bit demand growth estimate for 2023 by 0.8%p (lifting its forecasts across all applications except for servers).

• Excess demand should increase the most in the graphics DRAM segment, where SK Hynix holds a competitive edge.

2) SK Hynix’s aggressive efforts to push out shipments and solid DDR5 prices

• According to DRAMeXchange, SK Hynix''s shipments of DDR4/DDR3 have increased sharply.

• We may revisit our 2Q23 DRAM bit shipment growth estimate (+23% currently).

• Higher-than-expected DDR5 sales will likely mitigate ASP declines arising from aggressive shipments.

3) Implications of potential Western Digital-Kioxia merger

• In the case of SK Hynix’s acquisition of Intel’s NAND arm (Solidigm), post-deal market share gains were marginal because the two businesses operated mostly in different segments (limiting synergies).

• However, if the merger between Western Digital and Kioxia is completed, sales network integration is likely to result in greater influence in key segments.

• Potential valuation gains on SK Hynix’s Kioxia holdings could provide upside to the Korean chipmaker’s BPS.


Recommendation

Favorable environment for SK Hynix despite tough market; time to overweight the stock

• We see volume growth outweighing ASP declines in 2Q23, with losses slightly narrowing QoQ to W3tr.

• We also estimate inventory valuation losses will fall sharply to W0.2tr from 2Q23, with the firm aggressively pushing out shipments.

• We believe that downward earnings revisions have come to an end and expect write-backs of inventory valuation losses to have a positive impact down the road.

• We maintain our Buy rating and target price of W120,000, which is based on 1.5x our 2023F BPS of W81,822. As mentioned above, upward revisions to Kioxia’s valuation could push up BPS estimates for SK Hynix.