SK Hynix's 'Surprise Earnings' Supported by Server Demand... But Uncertain Second Half

SK Hynix Q1 Operating Profit Hits 800 Billion KRW... 'Earnings Surprise' Exceeds Market Expectations
Prolonged Pandemic Likely to Slow Server Memory Semiconductor Demand
Concerns Over COVID-19 Shock Impact on H2 Performance
Global Semiconductor Shipments See First Ever Two Consecutive Years of Decline

[Asia Economy Reporter Kim Hyewon] SK Hynix received a first-quarter report card that greatly exceeded expectations despite the COVID-19 pandemic, thanks to demand for server memory semiconductors. Although DRAM faced a seasonal downturn and global smartphone sales sharply declined due to COVID-19, demand for server products offset these effects. However, if the COVID-19 situation prolongs, there is a possibility that sales of server-oriented memory products may slow down in the second half of the year, making future market conditions difficult to predict.

◆ First-quarter 'Earnings Surprise'... The Hard Times Begin in the Third Quarter = Initially, the market expected SK Hynix's first-quarter operating profit to be in the 500 billion KRW range. However, SK Hynix explained that the strong performance, which exceeded forecasts by 52%, was due to increased sales of server products, yield improvements, and cost reductions. DRAM shipments decreased by only 4% compared to the previous quarter, while the average selling price rose by 3%. NAND flash shipments increased by 12% quarter-over-quarter, driven by growing demand for server solid-state drives (SSD), and the average selling price rose by 7%.

SK Hynix is expected to maintain relatively strong performance compared to competitors in the second quarter as well. Securities firms forecast second-quarter operating profit to exceed 1.3 trillion KRW, more than doubling year-over-year. An industry insider said, "SK Hynix has many long-term contracts at relatively high fixed transaction prices in the second quarter, thanks to server demand following the first quarter."

The problem arises from the third quarter, when the prolonged impact of COVID-19 is expected. Cha Jin-seok, SK Hynix's Chief Financial Officer (CFO), said during a conference call, "The unexpected spread of COVID-19 will inevitably slow global smartphone sales," adding, "The biggest variable in future demand forecasts is the timing of the containment of the COVID-19 situation and the recovery of global economic activities. If the situation prolongs, a slowdown in demand for server memory semiconductors cannot be ruled out, and logistics disruptions such as raw material supply issues may occur." He continued, "At present, it is difficult to say that significant production disruptions occurred in the first quarter, but if COVID-19 prolongs, there is a possibility that actual production disruptions will appear more noticeably in the second half."

Currently, the annual consensus for SK Hynix's performance compiled by securities firms is 32.2749 trillion KRW in sales and 6.6538 trillion KRW in operating profit, representing increases of 20% and 145% year-over-year, respectively. Lee Seung-woo, a researcher at Eugene Investment & Securities who provided the most conservative forecast, explained, "Due to employment and investment contractions, corporate performance is deteriorating, and IT-related investments in the second half are likely to be affected by COVID-19. It seems difficult for server DRAM prices to maintain their strength, so I have lowered the annual operating profit forecast from 6 trillion KRW to 4.5 trillion KRW, a reduction of about 25%."

◆ Semiconductor Shipments Expected to Decline for the First Time Two Years in a Row... "Thorough Response to Demand Fluctuations" = Despite SK Hynix's strong performance, the global semiconductor industry appears to be hampered by COVID-19. For the first time, a gloomy forecast has emerged that semiconductor shipments will decline for two consecutive years. On this day, U.S.-based semiconductor market research firm IC Insights projected that global semiconductor shipments will decrease by 3% compared to the previous year. This follows a 6% decline in shipments last year compared to 2018, marking the first two-year consecutive decline in semiconductor history.

Semiconductor shipments have shown year-over-year declines four times before: in 1985, 2001, 2009, and 2012. Since 2013, shipments grew for six consecutive years, experiencing rapid growth, but turned to a decline last year due to oversupply and stagnation in the smartphone market. IC Insights recently forecasted that the global semiconductor market size will shrink by 4% to $345.8 billion this year. In January, it had expected 8% growth, then lowered it to 3% last month, and has now further reduced the forecast this month.

SK Hynix aims to thoroughly prepare for demand fluctuations despite uncertainties. It plans to maintain its existing plan to significantly reduce capital expenditures compared to last year, while ensuring no disruptions to process miniaturization and the preparation of the M16 cleanroom scheduled for year-end. The conversion of some DRAM production capacity to CIS and the transition of NAND flash to 3D will also proceed as planned.

DRAM will actively respond to the rapidly increasing demand for high-capacity server modules of 64GB or more and improve profitability by expanding sales of 10nm-class second-generation (1Y) mobile DRAM. The 10nm-class third-generation (1Z) product will begin mass production in the second half, and SK Hynix plans to respond to the growing markets for GDDR6 and HBM2E as well.

NAND flash will expand the proportion of 96-layer products and start mass production of 128-layer products in the second quarter. Additionally, it plans to further increase the SSD sales ratio, which reached 40% in the first quarter, and steadily improve profitability by diversifying its portfolio centered on data center PCIe SSDs.

This content was produced with the assistance of AI translation services.