SK hynix is expected to continue on a bullish run in the stock market this year on the back of the firm’s stable earnings portfolio and strength in the memory chip business, analysts said Tuesday.

The shares of the world’s second-largest memory chip supplier have been undergoing a correction period over the past week after solid gains in the fourth quarter of last year powered by a foreign investors’ buying spree.

Analysts said that there are four key changes that will support the rebound of SK hynix shares — increasing technological complexity, demand becominginelastic, memory becoming highly concentrated and entry barriers rising.

“The new paradigm creates a novel industry landscape that no longer rewards aggressive investment and is characterized by slowing growth amid limited capacity additions and natural loss from nearing scaling limits,” Bernstein Research, a Wall Street-based premium research firm wrote in a note to clients.

“Amid the onset of a new market paradigm, SK hynix has benefited from structural industry changes as a pure memory player,” said Bernstein, adding it has revised up its target on the Korean chipmaker to 55,000 won.

SK hynix shares closed at 36,4000 won Tuesday, down from a record high of 39,000 won on Jan. 8.

The stocks gained 38.3 percent in 2013 thanks to foreign investors’ strong purchases. On Jan. 8, the market capitalization of the shares reached 27.68 trillion won, compared with 3.05 trillion won in 2008.

SK hynix was the most popular stock among foreign investors last year as they made net purchases of nearly 4 trillion won on shares of the microchip manufacturing arm of SK Group.

Bernstein said the positioning of SK hynix is in good shape because the firm is the solid number-two player in DRAM (dynamic random-access memory). It added that it has a catch-up potential in NAND to be realized once the company begins V-NAND shipments in the first half of 2014.

Brokerage houses have revised up their target on SK hynix as a new market order dominated by only a few players are benefiting the company.

They said that while a weaker-than-expected DRAM recovery, poor execution in technology migration and headwinds from the dollar-won appreciation are cited as the biggest downside risks for the Korean chipmaker, local analysts say the impact of those challenging factors on SK hynix’s fundamentals will be limited.

“You should buy more SK hynix shares. Significant upside for all memory chip suppliers is now expected. It’s no surprise SK hynix shares will go over 60,000 won, sometime this year,” said Kim Il-tae, chief investment officer at MIDO Investment in Yeouido, the Korean version of Wall Street.

Enhancing profitability is the goal of memory chip suppliers as the market comes to the end of a period of significant consolidation in DRAM with three dominant players emerging, each with no ambition to increase market share.

The NAND industry also has a high concentration with only six major players and four major technology camps — Samsung, SK hynix, IMFT (Intel and Micron’s joint venture) and Toshiba/SanDisk. Currently, Samsung and SK hynix control 74 percent of industry revenue.

DRAMs are mostly used in conventional computing devices, while NAND chips are functioned to store data even a device is switched off.

“Despite near-term jitters about a DRAM price-correction possibility, we focus on the reduced earnings fluctuation at SK hynix, as steady quarterly operating profits of 1.5 trillion won and 1.6 trillion won from the second half of this year should grant minimum annual profit of 6 trillion won going forth,” said Bernstein.

By: DocMemory
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