Market conditions more sluggish than expected in 3Q20
SK Hynix is projected to report sales of KRW7.88tr (-8.5% QoQ) and operating profit of KRW1.2tr (-38.3% QoQ) for 3Q20, lower than previous forecasts. With chipmakers in negotiations over server DRAM prices, shipments are not going out expeditiously. The clients, facing weaker macro demand, are passing the inventory burden onto the chipmakers. DRAM price cuts (-10% QoQ for server DRAM, -7% for DRAM blended) could be steeper than expected in3Q.
Memory chip demand weaker than non-memory due to transfer of inventory
The weakness in demand for memory chips is more prominent than non-memory chips. The same goes for share prices. But we believe overall demand will not be different for memory and non-memory chips. Memory chips are more like a commodity and thus show price fluctuations with transfer of inventory.
Server providers have preemptively stocked up on memory inventory in 2Q on fears of a disruption in the value chain caused by COVID-19. They are now relaying the inventory burden onto the chipmakers in 3Q, seeking to lower prices from the hiked levels of 2Q. We expect signs of recovery to emerge from 4Q as shipments increase with inventory at clients returning to normal levels.
Shares likely to defy negatives; current valuations near March bottom
SK Hynix shares will likely rise in September-October led by momentum from recovery in shipments. DRAM contract prices should be raised in 1H21. It looks like more time is needed for confirmation of a market upturn. Macro issues arising from the spread of COVID-19 and US-China trade disputes also weigh. However, we believe further downside is limited and the bottom will be confirmed in the near term. We revise down our target price for SK Hynix to KRW105,000,but retain our BUY rating on forecasts for a market upturn in 2021.
The decline in DRAM contract prices has started to slow. Consensus forecasts have been adjusted downward considerably. Shipments are expected to recover from end-3Q with reduction in inventory at clients. The shares are currently trading at a 12-month forward PBR of 0.88x, near the bottom (0.86x) seen in March when the COVID-19 panic reached its peak. We recommend approaching the stock in terms of valuation merit.