SK Hynix warns chip prices near peak after record profit

PUBLISHED : Thursday, 25 July, 2013, 12:20pm
UPDATED : Thursday, 29 August, 2013, 4:13am

South Korean chipmaker SK Hynix warned on Thursday soaring prices of computer memory chips may come to an end soon, as a year-long rally helped it report a forecast-beating record quarterly profit and gross margin.

The key Apple supplier’s prediction of a slowdown in chip price growth means investors may have to brace for more normalised profits from chipmakers going forward, although the industry remains well-placed to cope with any downturn.

Prices of commodity dynamic random access memory (DRAM), used in personal computers, have almost doubled so far this year even as global PC shipments have slumped, thanks to years of cautious investment designed to keep supply in check and the conversion of factory capacity to more profitable chips used in smartphones and tablets.

We expect DRAM shortages will continue even into the fourth quarter

“We expect DRAM shortages will continue even into the fourth quarter, and in normal circumstances, prices have to go up,” Park Nae-hak, vice-president and head of Hynix’s mobile and consumer marketing, told analysts.

“But given that they’ve been rising for the past one year, memory chip prices now account for too big a portion of our clients’ total materials costs. So there’s a bit of uncertainty regarding how much prices can actually go further from here.”

Park said Hynix had already finalised most of its DRAM sales contracts for the third quarter at higher sales prices thanks to chip shortages. DRAM chips generate 73 per cent of the company’s total sales.

Reflecting concerns of slowing growth, sellers pounced when Hynix shares rose as much as 2.5 per cent after the record earnings announcement.

The firm said it expected shipments of mobile DRAM chips to surpass computer DRAMs for the first time next year, reflecting the shift in consumer electronics away from bulky PCs and towards tablets and smartphones.

In response to growing mobile demand, Hynix said it would increase flash memory chip output and forecast its shipments of the semiconductors used in mobile devices would rise by around 20 per cent in the third quarter. It expected DRAM chip shipments to grow only about 5 per cent.

Manufacturers are rushing to boost flash memory chip production to ride a boom in the mobile devices market driven by emerging economies like China, the world’s biggest smartphone market, where strong demand for cheap handsets is offsetting slower high-end sales growth in more mature markets.

Toshiba said earlier this month it was considering investing up to 30 billion yen (HK$2 billion) on new equipment to manufacture flash memory chips.

“We think overall market expectations for the high-end smartphone market were too bullish. But low-end segment growth is quite solid and we stick to our previous forecast of the overall smartphone market for this year at 960 million units,” Park said.

That represents nearly 30 per cent growth from last year.

Hynix, which competes with bigger rival Samsung Electronics, Japan’s Toshiba and US-based Micron Technology, reported 1.1 trillion won (HK$7.6 billion) in operating profit for April-June, beating analysts’ consensus forecast of 916 billion won.

The result, based on a record gross margin of 38 per cent, marks a sharp improvement from a tiny 5.2 billion won profit a year ago and 317 billion won profit in the previous quarter.

Sales jumped 49 per cent to a record 3.9 trillion won, easily beating a 3.6 trillion won forecast.

The better-than-expected earnings were partly attributed to increased sales of more profitable mobile DRAM chips and NAND flash chips. The portion of DRAM chips used in personal computers dropped to slightly more than 30 per cent of the company’s total DRAM sales.

Hynix said strong demand for DRAM and NAND flash chips would continue in the second half, largely thanks to new smartphone launches and growing sales of devices with larger data storage capacity.