Semiconductors and Batteries Facing Large-Scale Investment... 'Financial Risk' Alert

SK Hynix's Borrowings Surpass 20 Trillion Won for the First Time
LG Energy Solution's Debt Increases by Over 3 Trillion Won
Financial Stability and Credit Ratings Negatively Impacted...Mid-sized Companies' Debt Rises

SK Hynix Icheon Campus M16 exterior. (Photo by SK Hynix)

[Asia Economy reporters Oh Hyung-gil and Moon Chae-seok] Semiconductor and battery companies, which are proactively making large-scale investments, are struggling with financial risks such as borrowings and debt. SK Hynix's borrowings have surpassed 20 trillion won for the first time in history, and LG Energy Solution's debt has increased by more than 3 trillion won. Amid growing management uncertainties due to the 'three highs' (sharp rises in exchange rates, prices, and interest rates), concerns are emerging that the declining financial stability of companies will act as a management risk in the future.

Financial Risk Alert Issued for Semiconductor, Packaging, and Display Sectors

According to industry sources and the Financial Supervisory Service on the 29th, SK Hynix's borrowings in the third quarter reached 22.0214 trillion won, surpassing 20 trillion won for the first time. After crossing 10 trillion won at 10.5235 trillion won in the fourth quarter of 2019, the amount more than doubled over 11 quarters (2 years and 9 months). The net borrowing ratio is also rising sharply. Debt also surged, increasing by 6.6272 trillion won from 34.1954 trillion won at the end of last year to 40.8226 trillion won in the third quarter. The debt ratio rose from 54.98% to 59.4% during the same period.

The simple increase in borrowings is generally seen as 'ammunition stockpiling' for future investments due to the nature of the high-cost equipment industry, but some companies are showing a steep surge, raising concerns that financial stability could be shaken. In the worst case, this could weaken institutional investors' investment sentiment in the financial investment industry, making it difficult to secure funds appropriately, and lead to a vicious cycle negatively affecting stock prices and credit ratings.

SK Hynix stated that the sharp increase in borrowings 'this year' is unrelated to the acquisition of Solidigm conducted 'last year.' An industry insider said, "The increase is a result of proactive liquidity securing in preparation for this year's semiconductor market downturn and the high interest rate and high exchange rate environment, as well as a borrowing increase illusion effect due to the rise in foreign currency bond valuation from exchange rate increases," adding, "It does not seem to indicate a sign of deterioration in the business fundamentals."

Samsung Electronics also saw its debt increase by 35.4278 trillion won (39.4%) from 89.9437 trillion won three years ago to 125.3715 trillion won, and borrowings rose from 16 trillion won to 18-19 trillion won over 11 quarters before turning to a decrease in the third quarter.

The semiconductor substrate and packaging industry is also steadily increasing borrowings by 1 to 2 trillion won per quarter as investments rise. Samsung Electro-Mechanics borrowed around 2 trillion won from 2019 to the first half of last year. LG Innotek borrowed about 2 trillion won quarterly over three years.

The display industry is also receiving evaluations that its financial indicators are too poor to be seen as simply increasing borrowings for investment purposes. LG Display's net borrowing ratio surged 10 percentage points from 74% to 84% over three years, and borrowings including bonds increased by 1.8625 trillion won (13.9%) from 13.4288 trillion won to 15.2913 trillion won.

Rapid Debt Increase in Battery and Materials Companies Accelerating Investments

Battery and materials companies making large-scale investments in North America and Europe are also experiencing rapid debt increases as borrowings rise. LG Energy Solution's debt on a consolidated basis increased by 24% from 15 trillion won at the end of last year to 18.7 trillion won as of the end of the third quarter this year. During the same period, borrowings rose from 7 trillion won to 8.3 trillion won.

Samsung SDI, which is pursuing additional joint ventures in North America following Stellantis, also saw its debt increase by about 3 trillion won. Debt rose from 10.6 trillion won at the end of last year to 13.4 trillion won, with the battery business (Energy Solution division) accounting for nearly 97.9% of total debt.

SK On's debt ratio is approaching 293.4%. Although it is currently raising pre-IPO investment funds, the slow progress is contributing to the increase in debt of its parent company, SK Innovation. SK Innovation's total debt surged by nearly 14 trillion won from 30 trillion won at the end of last year to 43.8 trillion won in the third quarter this year.

Mid-sized battery materials companies are also showing rapid debt increases. EcoPro BM, a cathode material producer, had debt of 1.8681 trillion won at the end of the third quarter, with borrowings due within one year reaching nearly 1.4411 trillion won. L&F, which is pursuing a U.S. entry plan targeting mass production in 2025, also saw a sharp increase in debt to 1.6185 trillion won.

Park Jong-il, senior researcher at NICE Credit Rating, pointed out, "Compared to the past when the focus was on production capacity scale, the nature of investments has diversified to localization and supply chains, increasing uncertainty. If the strong dollar trend continues, the investment burden converted to Korean won will increase, and the rise in overseas bases will inevitably increase foreign currency debt and interest expenses."