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Poised to stand out, come rain or shine

Reiterate Buy and TP of W260,000

We maintain our Buy rating and target price of W260,000 on SK Hynix. We think the recent share price pullback was driven by profit taking rather than fundamental issues, as there has been no major change in semiconductor market conditions. While we trimmed our target P/B from 2.1x to 2x due to the potential for bit shipments to fall short of guidance in 3Q24 (amid inventory management efforts in some legacy chip segments), we keep our target price unchanged, as we see 2025 operating profit jumping 71% YoY on stable high-bandwidth memory (HBM) demand. Even if market conditions deteriorate sharply, we believe SK Hynix will stand out thanks to its competitive edge in HBM.

Superior technology in leading-edge processes

SK Hynix has completed yield/performance verification processes for 1b DRAM. For now, the company is limiting production on the 1b node to HBM3E (reflecting a cautious capex approach amid the downturn in semiconductor sales), but we expect to see an expansion in applications in 2025. The development of 1c DRAM is also likely to be completed by year-end. We anticipate that the company will continue to outperform rivals in terms of both chip performance and production costs, backed by smooth process migration. Indeed, while rivals are falling behind due to the increasing challenges associated with node advancement, SK Hynix continues to stands out.

Meanwhile, the company is in the final stages of developing 12-layer HBM3E chips, which will likely be adopted by Nvidia’s Blackwell GPU. For both 8- and 12-layer HBM3E chips, SK Hynix has already forged 2025 supply contracts with Nvidia. Of note, 12-layer HBM3E chips should command a price premium, as they have 50% higher bit density than 8-layer chips. We estimate operating profit from HBM chips at W5.9tr in 2024 and W10.7tr in 2025.

Profitability-focused strategy

Despite the HBM-led recovery in DRAM earnings, SK Hynix plans to pursue a profitability-focused business strategy. Indeed, the firm is likely to take a conservative approach to capex in light of the potential expansion of a key domestic rival into 8-layer/12-layer HBM3e and the entry of leading Chinese players (e.g., CXMT) into the legacy DRAM market. While 2025 capex may exceed the 2024 level (W20tr), we view this as reasonable given the need for new fabs and the introduction of EUV technology. In addition, the firm is now on track to improve its financials, having paid down debt for four straight quarters (net debt down by W7.5tr from the 3Q23 peak level).