Sunday, December 4, 2022

SK Hynix announces Capex cuts by 50% and selling China fabs an option in a contingency plan

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Addressing the third quarter earnings result conference, SK Hynix Chief Marketing Officer Kevin Noh said the company is cutting its 2023 capital expenditure by more than 50% year-on-year in light of oversupply on the memory market and hinted at a possibility of considering selling its fabs in China if US-China Chip War makes its operation in China too difficult to continue.

Mr. Kevin Noh, President and CMO at SK hynix

“As a contingency plan, we are considering selling the fab, selling the equipment, or transferring the equipment to South Korea,” SK Hynix Chief Marketing Officer Kevin Noh said in a conference call to discuss its third-quarter earnings results. “It’s a contingency plan,” he stressed. “We want to [continue to] operate without facing this situation.”

Noh said the South Korean company, the world’s second-largest DRAM maker, “cannot help but suffer” due to the many limitations on running its fab in Wuxi, near Shanghai. The facility produces DRAM chips to order for other companies.

Two weeks ago, SK Hynix announced that it has received a one-year waiver from Washington to continue using U.S. technology for producing advanced memory chips in China. But Noh said he is not sure if the company can get it extended after the period expires.

“We expect to extend it each year, but it is not for sure. It is very uncertain,” said Noh.

According to NOH, it is a contingency plan, although the company hopes to continue operating in China. He said if the Chip War makes it too difficult to maintain its operations in China, it will consider selling the fab, selling the equipment, or moving the equipment to South Korea as a contingency plan.

Noh’s warning underlines the far-reaching consequences of Washington’s crackdown on China’s tech ambitions and how even companies in countries that are close U.S. allies — such as South Korea — can end up engulfed in the fallout. SK rival Samsung Electronics, which is due to announce final third-quarter earnings on Thursday, also produces chips in China.

Taiwan Semiconductor Manufacturing Co., meanwhile, has also secured a one-year license to continue ordering American chip-making equipment for its expansion in China, the company said earlier this month.

SK Hynix’s Wuxi fab produces more than 40% of the company’s DRAM chips, its main business, according to market research firms. Such chips are widely used in electronic devices, from computers and smartphones to cars.

Brady Wang, an analyst at Counterpoint Research, sees Noh’s comments as being meant to put in place “a medium- to long-term contingency plan” so the company can let investors know in advance what might happen, with a complete withdrawal from China being the worst-case scenario.

Still, Wang stressed the clock is clearly ticking for the company.

“SK Hynix has to make a decision within the given waiver year,” he said in an email.

SK Hynix said operating profit totaled 1.7 trillion won ($1.2 billion) for the three months through September, while revenue fell 7.0% to 11.0 trillion won year on year.

SK Hynix reported on October 26 with sales and operating profits decreased by 20.5% and 60.5% quarter-on-quarter respectively as the semiconductor memory industry faces unprecedented deterioration that sees slumping shipments from PCs and smartphone manufacturers, who are major buyers of memory chips.

Analysts said that SK Hynix could swing to a loss in the final three months of this year as unfavorable macroeconomic conditions burden the memory chip industry, which is going through one of its periodic down cycles.

“Considering tough conditions in [chip] prices in the fourth quarter, [SK Hynix’s margin] will continue to drop quarter on quarter,” Jay Kim, an analyst at Sangsangin Securities, said in a note on Wednesday after the earnings announcement. “We cannot rule out the possibility of the company swinging to a loss depending on price assumptions.”

SK Hynix shares rose 0.4% to close at 93,900 won, paring gains of as much as 2.1% in earlier trading.

The current year’s investment is expected to be in the upper range of KRW 10-20 trillion (approximately US$7 – 14 billion)

SK Hynix also revealed that it plans to gradually reduce the production volume of its relatively less profitable products. The plan is to normalize the market’s supply and demand balance by maintaining the current investment trend and production reduction for a certain period of time.

“We will leap forward as a leading semiconductor memory player by overcoming this downturn based on our potential that has always turned crises into opportunities in the past,” said Noh.

However, SK Hynix anticipated that the demand for memory chips in data center servers, while decreasing in the short term, will continue to grow in the mid-to-long-term, as hyper-scale data centers are continuing their investment to meet the increasing scale of industries such as artificial intelligence (AI), big data and metaverse. SK Hynix emphasized that as it is leading the latest DRAM technologies such as high bandwidth products, including high bandwidth memory 3 (HBM3) and DDR5/LPDDR5, the company will solidify its position in terms of long-term growth.

Although SK Hynix and Samsung both received a 1-year exemption from the US government from the new export controls announced on October 7, a recent report by Rhodium warned that the South Korean memory manufacturers should not count on the renewal of the license, as the ban is likely to spill over to them eventually.

Since memory chip manufacturers need to upgrade their equipment frequently to ensure competitiveness, US export control on importing advanced DRAM and NAND tools would make their investments in China eventually uncompetitive.

“New restrictions on the memory market are considered to be most acute because Chinese companies are much more competitive in memory (90% of China’s leading-edge capacity), compared to logic chip production (10%),” said Rhodium.


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