Asia Essentials

Event

SK Hynix more than doubled its OP in 4Q16 on QoQ basis to Won1.54tr, 10%above street consensus. We raise our top-of-the street 2017 OP forecast by9% and raise the target price from Won62,000 to Won66,000. Outperform.

Impact

Record-high sales of Won5.36tr in the early phase of memory upturn.

DRAM sales jumped 32% QoQ to Won3.9tr (72% of sales) in 4Q16, driven by14% bit growth and 13% ASP rise. We calculate DRAM margin to haveexpanded to 35% from 23% in the previous quarter. Meanwhile, NANDmargin improved sharply, from 3% in 3Q16 to 12% in 4Q16, on 11% QoQ risein sales to Won1.36tr. Hynix announced it would pay a cash dividend ofWon600 per share (versus Won500 in 2015), despite a profit decline for thefull year. This is to keep the promise of 20% payout ratio.

Surging eMCP (multi-chip package) demand from China. Chinesesmartphone vendors have low inventories of eMCP, according to SK Hynix,belying sceptics’ fears of a supply glut. The company says it is unable to meetphone vendors’ growing demand for eMCP (DRAM+NAND). We have longhighlighted the structural trend of 4G phone upgrade demand in emergingmarkets and hardware spec competition among Chinese smartphonevendors. eMCP is virtually a duopoly between Samsung and Hynix.

The best is yet to come in DRAM. Hynix expects DRAM demand growth of20% in 2017, slightly exceeding supply growth in the year, resulting inprolonged tight supply. In 1Q17, it expects a low-single-digit decline in DRAMbit shipment, as it depleted inventory in 2016. Its focus this year is oncontinued geometry migration to 21nm node (to over 60% by year-end) and18nm node (mass production from 3Q17). While the ground floor of the M14fab is nearly full, the remaining clean-room space is for future geometrymigration to 21nm/18nm. The company expects the new DRAM capacity inWuxi, China should come on stream in 2019.

Planar to 3D NAND cross-over likely in end-2017. Half of M14 fab’s 2ndfloor should start mass production of 3D NAND in 3Q17, according tomanagement, along with a shift to 72-layer count. As a result, 3D NAND bitportion should rise from 10% in 2016-end to over 50% in 2017-end, achievingcross-over. The other half on the second floor will be clean-room ready by2017-end. New 3D NAND fab in Cheongju will be also commissioned in 2019.