Initiation of Coverage: Initiating coverage on SKHY with a Buy rating and PT of $204

Research evidence excerpt

Initiation of Coverage: Initiating coverage on SKHY with a Buy rating and PT of $204

Forecast returns

Forecast price appreciation 50.8%

Forecast dividend yield 1.2%

Forecast stock return 51.9%

Market return assumption 9.0%

Forecast excess return 42.9%

Company Description

SK Hynix is a pure-play memory semiconductor company, specialising in DRAM (78% of sales

in 2025) and NAND flash memory chips (21% of sales). In 2012, Hynix became part of the SK

Group after SK Telecom became its biggest shareholder (21%). The company was renamed

SK Hynix. Globally, SK Hynix is the second-largest DRAM chip manufacturer and the third-

largest NAND flash vendor in terms of revenue. It has manufacturing operations in Korea and

Wuxi/Dalian, China.

Valuation Method and Risk Statement

Whilst overall cyclical risks have decreased longer term for DRAM (our "Goldilocks scenario"),

amidst significant consolidation (3 players, from 15 in 1998) and lower growth, cyclical

corrections will still occur as the sector retains commodity-like characteristics. The NAND flash

industry structure has not changed as dramatically, but the coming rollout of 3D NAND flash

manufacturing is restraining the players' willingness to add large increments of capacity at

2D. That being said, both segments are sensitive in particular to smartphones/tablets

demand, mix within those segments, and to a lesser extent enterprise spend (enterprise solid

state drives, servers). The industry also remains capital-intensive, and with contract prices

negotiated every 2 weeks to 3 months, cash flows can change quickly – so adequate

capitalization is required. Lastly, the industry may have to move to new memory technologies

longer term to supplement, if not replace, current silicon-based Flash and RAM memory

structures.