SK hynix, the semiconductor affiliate of SK Group, said it will cut its investment in memory chips amid weak demand and the ongoing supply glut in the industry.

"This year's investment will be cut because the company will put its priority on enhancing technology migration rather than expanding its market share," SK hynix President Kim Joon-ho told investors in a conference call after getting the results of first quarter earnings, Tuesday.

SK hynix invested 6.6 trillion won in its chip plants located in Cheongju and Icheon, as well as in Wuxi in China, according to the company.

The investment cut came after the company's first quarter profit took a huge tumble. Its January-March quarter sales fell 24.1 percent to 3.65 trillion won compared to the same period last year, while operating profit was more than halved to 561 billion won.

Its quarterly profit was the weakest in three years.

"The first quarter was bad and the outlook for the second quarter won't be good. It's unlikely that the industry will see any structural recovery in the current quarter," Kim said, adding that inventory corrections by clients operating datacenters and weak chip demand for PCs hit the company bottom line.

Prices for DDR3 4-gigabit dynamic random access (DRAM) chips averaged $1.81 in the latest period, compared with $3.42 a year earlier, according to data from inSpectrum. DRAM chips, along with NAND flash memory, are used in smartphones, tablets and PCs.

Market analysts say SK hynix's decision to cut its capital spending was a message to Samsung Electronics in which the market leader was intent on igniting a competitive price war, though the memory chip industry could have enjoyed a new era of profitability after painful restructuring.

"SK hynix couldn't comment about reasons that have been resulting in declining chip prices as strategies are different by firms. SK will be concentrating on finding measures to narrow the technological gap with market leaders," Kim told investors.

Rather than sitting back and enjoying higher profit margins with 40 percent market share of memory chips, Samsung is intent on stretching its market share to 50 percent both in DRAM and NAND chips, according to Mark Newman at Bernstein Research.

According to Kim, SK hynix will focus on developing chips using 10-nanometer level processing technology to win back customers lured away by Samsung.

Specifically, the SK affiliate is targeting 21-nanometer mass production for PC DRAM in the second quarter of this year and mobile LPDDR4 in the second half of this year, which should drive costs from the second quarter of 2016.

The SK executive is dedicated to increase the company's foothold in the NAND flash business. "We expect strong sales of NAND flash chips with such devices as solid state drives (SSDs).

SSDs are considered the next-generation storage device that will eventually replace the conventional hard disk drives (HDDs).

The company president said its latest M14 line will be fully operational from the first quarter of 2017 as SK hynix is on a track to boost the output of 3D NAND flash chips at its M12 factory in Cheongju.

Kim confirmed that the company will payout increased dividends to investors over the next three years; however, he declined to specify this year's dividend ratios.

Despite its dismal first quarter performance, shares of SK hynix increased 6 percent to end at 29,150 won, Tuesday, on the local bourse as investors understood that the first quarter results were in line with market consensus.

"We think the first quarter's slump is temporary as investors are thinking that SK's earnings will look stronger in the second quarter than we expected," said Claire Kim, an analyst at Daishin Securities.

By: DocMemory
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