[Click eStock] "SK Hynix in Short-Term Correction... Q4 Stock Price Rise Expected"

Shinhan Financial Investment Report

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] Shinhan Financial Investment maintained its buy rating and target price of 155,000 KRW for SK Hynix on the 24th. This is based on the judgment that the easing of IT supply chain disruptions in the fourth quarter of this year and inventory digestion by downstream companies could act as factors driving the stock price up.

The company's third-quarter earnings are expected to show sales of 11.84 trillion KRW and operating profit of 4.1 trillion KRW, representing growth of 14.7% and 52.2% respectively compared to the previous quarter. Prices of DRAM and NAND are expected to rise by 8% each compared to the previous quarter. Do-yeon Choi, a researcher at Shinhan Financial Investment, said, "Currently, market interest in third-quarter earnings has decreased, and concerns about the peak of the business cycle are suppressing the stock price," adding, "Due to the impact of IT supply chain disruptions, there is high uncertainty about earnings in the fourth quarter and the first quarter of next year." The price change rates for DRAM and NAND in the fourth quarter of this year are expected to decline by 4% and 2% respectively, and are forecasted to drop by 5% and 4% next year.

However, the current cycle is judged to be different from the typical downturn phase seen in the second half of 2018. At that time, genuine demand decreased, whereas now IT supply chain disruptions have occurred, making the nature of inventory adjustments different, and supply burdens are appearing to be limited. The inventory levels of downstream companies are also estimated to be favorable at 8 to 10 weeks currently, compared to 12 to 16 weeks in 2018.

Researcher Choi explained, "It is reasonable to approach this adjustment as a unique cycle caused by COVID-19, and ultimately it is better to view it as divided into two adjustments and three mini-up cycles since the second half of 2019," adding, "Although uncertainty in the memory market may exist until the first quarter of next year, recovery in the market is expected from the second quarter." Attention should also be paid to the recent slowdown in the spread of COVID-19 in Vietnam and Malaysia, as well as the decline in DRAM spot prices. Next year's earnings are estimated to grow by 26.5% in sales to 53.23 trillion KRW and by 67.4% in operating profit to 19.71 trillion KRW compared to the same period last year.

Researcher Choi said, "The current stock price has already reflected a significant portion of the worst-case assumptions, so a stock price rebound recovering from excessive declines is expected," and added, "In a situation where a stock price rally is anticipated during the phase of expanding downstream orders, attention should be expanded to the fourth quarter when IT supply chain disruptions are expected to ease and downstream inventories are likely to be largely digested."