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Key drivers: Semiconductors, energy, and shareholder returns

Investment recommendation and valuation

We maintain our Buy rating and target price of W270,000 on SK Inc. Our valuation reflects the value of the IT services business, dividend income, and the value of subsidiary stakes. Notably, we applied a 50% discount to the value of subsidiary stakes in light of SK Inc.’s holding company structure and high debt levels across the group.

SK Inc. has a favorable shareholder return policy; on top of regular dividends, it plans to repurchase treasury shares representing over 1% of its market cap each year from 2022 to 2025. Yesterday, the company disclosed plans to retire 659,626 shares.

Earnings outlook for unlisted subsidiaries and investment highlights

SK Materials (CIC): QoQ growth has continued for two straight quarters, driven by solid sales of specialty gases (NF3) amid a partial recovery in semiconductor utilization and the start of operations at a new industrial gas plant. We believe earnings will continue to grow in 2H24 on expansion into next-generation etching gases (HBr) and photoresist products. We forecast revenue to reach W1.3tr (+10% YoY) in 2024 and W1.6tr (+17% YoY) in 2025 (EBITDA forecasts: W426bn in 2024 and W515bn in 2025).

SK Siltron: Due to high channel inventory, customers have not yet resumed wafer purchases despite ongoing utilization recoveries. That said, we expect earnings at SK Siltron to improve from 2H24 on a sales volume recovery, with revenue climbing 5.1% YoY to W2.1tr in 2024 and 17.5% YoY to W2.5tr in 2025 (EBITDA forecasts: W689bn in 2024 and W910bn in 2025). For silicon carbide (SiC) wafers (a new business), the firm received a US$544mn loan from the US government in Feb. 2023 and obtained further support from the state of Michigan in Apr. 2024 (US$77mn in investment subsidies and tax incentives); this suggests that the company is positioning itself as a key partner of the US government in building an electric vehicle value chain.

SK E&S: We forecast the system marginal price (SMP) to move lower amid stabilizing global energy prices (including LNG). Nevertheless, we project revenue to jump 11.9% YoY to W12.5tr in 2024 and 8.9% YoY to W13.6tr in 2025 (EBITDA forecasts: W2tr in 2024 and W2.3tr in 2025), backed by: 1) the superior power generation efficiency of the Yeoju plant (brought online in 2023); and 2) cost competitiveness (relative to rivals) resulting from direct LNG sourcing.