In 2H20, usage of general purpose semiconductor materials such as NF3 and WF6 is expected to slow h-h down following a strong 1H20. We positively view SK Materials’ adding of new products such as photoresist and hydrogen fluoride to its portfolio.

Earnings improve in 1H20 amid favorable memory semiconductor market conditions

Although adhering to a Hold rating, we raise our TP on SK Materials from W185,000 to W215,000 in reflection of upward adjustments to our 2020 earnings estimates. Our target P/B multiple assumes 2020~2022E average ROE of 25% with cost of equity of 7.5%. The firm’s shares are currently trading at a 2021F P/E of 17x, a level somewhat higher than that for other domestic semiconductor material players.

After bottoming in 4Q19, SK Materials’ quarterly OP showed improvement in 1H20, helped by a recovery in the memory semiconductor industry since 1Q20. As of June, the DRAM contract price upped 16% compared to the end-2019 figure, with NAND contract price climbing 8% over the same period. Versus 2H19, global memory shipments in 1H20 increased 7% h-h for DRAM and 9% h-h for NAND.

Memory semiconductor shipment growth to slow in 2H20

Believing that the pace of memory shipment growth in 2H20 will slow h-h, we forecast that SK Hynix’s 3Q20 DRAM shipments will slip 1% q-q. Samsung Electronics (SEC)’s 3Q20 DRAM shipment growth is projected to be flat q-q. Of note, hyperscalers’ data center investment concentrated on 1H20 due to a surge in non-face-to-face traffic amid the Covid-19 crisis. Therefore, as memory inventory levels at hyperscalers will likely exceed the appropriate amounts in 2H20, data center investment is expected to decline h-h.

Reflecting such, the DRAM price should drop 5% q-q in 3Q20. Given the high likelihood that both SEC and SK Hynix will slightly adjust their capacity investments in 2H20, material demand growth at semiconductor players is expected to lose some steam in 2H20. That said, we positively view SK Materials’ introductions of new products (eg, photoresist and hydrogen fluoride) to its product portfolio, adding to existing products such as NF3 and WF6.

By: DocMemory
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