SK Hynix - it's unusual. the markets highlight its extreme underestimation.

2018.8.12
SK Hynix
Closed at \81,100 (+1.63%) Target to \100,000 (+23.31%)
Indices
PHLX Semiconductor index 1,356.13 (+0.12)
KOSPI200 294.29 (+0.44)
G 10y 2.395% (-0.007%)
G 3y 1.963% (+0.01%)
USDKRW 1,121.40 (+0.22%)
1. The price is too cheap to be true. From Monday to Thursday in this week, SK Hynix had risen 8.86%. The number is much higher than 4.76% of its peer, Samsung Electronics. There are the two simplest things in perspective of the markets. Firstly, it’s rise of PHLX Semiconductor index. The index had risen 2.47% during same period. Secondly, KOSPI200 is recovering its recent plunge which come up with the concerns over EM, touching 294. SK Hynix is one of the companies in regional market which got the biggest benefit from the recovery. The company is the cheapest one among three players in memory-chip market. In standard of Aug 23, estimated PER of Micron Technology for 2018 is 4.23 and that of Samsung Electronics is 6.48. That of SK Hynix is just 3.57. As I always write in the paper, I hate using PER or PBR to evaluate appropriate level of price. But the underestimation could be another reason for the rise.
2. Concerns over semiconductor market will keep going. In consensus of the markets, growth of demand for D-RAM would be 40% during this year. That of 1Q18 was 66% in year on year. The number was the highest since 3Q11, and the trend has been proceeding. As response to the demand, the suppliers are trying to expand their equipment by increasing their capital expenses. According to research analysts in brokerages, SK Hynix will be using about KRW20tn in cash to invest on tangible assets in 2018 and 2019 individually. And Samsung Electronics will be using KRW35tn in each year. But Samsung Electronics is a conglomerate. The company’s businesses include home-appliances, mobile-phone, communications equipment. SK Hynix is just making semiconductors: D-RAM and NAND Memory. In market-share of D-RAM, Samsung Electronics taken 43.6%, and SK Hynix taken 29.9% on basis of revenues, during 2Q18. Growth of the revenue was much higher in SK Hynix with 19.5% against 8.2% of Samsung Electronics. In point of growth, SK Hynix has high-ground, and will remain as a growth company. Chinese rivals still need much more time to catch Korean players up. Their own technologies are still insufficient to make high-tech chips, and they couldn’t invest on tech companies in US or Europe anymore because the political leaders’ containments against China are being strong constantly. Trade-tension with the US is another obstacle to Chinese tech sector. The situation is different from the time when LG Display (034220.KS) went through the hardest time with the cheapest LCD from China. Let see real problem: possibility of peak of the market. Morgan Stanley keeps insisting that the market will enter to shrink – stage soon. The research institutions are suggesting that Amazon and Microsoft, which got the biggest demand for server D-RAM, will be starting to decrease its pace of the expansion of cloud- computing. The followers should be Chinese players, BATs: Baidu, Alibaba and Tencent. But recently, their situations aren’t good. With concerns over EM, their share-prices are plunging. It’s possible that they couldn’t take expansion as much as Amazon, Microsoft or themselves did in the past. If it comes up in real, the company wastes KRW20tn for nothing.
3. But still, there is an opportunity of additional rally. Even though concerns over semiconductor market keeps pushing the share-price, these aren’t dominant. The opinion is still divided among analysts, and day-by-day in the markets. And the market situation is in favor of the company. I still believe that KOSPI200 will be recovering its plunge by touching 300 in near future. And SK Hynix will get the most benefits from the recovery. Another point I want to raise is possibility of short-covering. According to Korea Investment & Securities, local brokerage firm, average price for accumulated short-positions is about \83,000. About 4.10% of issued shares is in short. It’s not that big number, but I think there is a possibility of that the number could go lower than 1% if KOSPI200 would touch 300. SK Hynix is the second largest market cap in the market.
4. My first target for the stock is \100,000 The performance would be excellent for the rest of this year, and the recovery of KOSPI200 will cover extreme underestimation. Usually, outlooks for the futures are more important than valuation for tech sector. But it’s value-momentum in this time, and SK Hynix will target to \100,000.
Mr. Banker, http://markety.tistory.com

 

SK Hynix.pdf