SK Hynix Upgraded To #BBB-# From #BB+# On Strengthening Operating Performance, Solid Financial Outlook Stable

Stocks and Financial Services Press Releases Friday January 20, 2017 16:52
HONG KONG--20 Jan--S&P Global Ratings

HONG KONG (S&P Global Ratings) Jan. 20, 2017--S&P Global Ratings today said it has raised its long-term corporate credit rating on Korea-based memory semiconductor manufacturer SK Hynix Inc. (Hynix) to 'BBB-' from 'BB+'. The outlook is stable.

The rating upgrade reflects our expectation that Hynix's operating performance will be strong and its debt leverage low despite high capital expenditures over the next one to two years, mainly due to favorable memory chip prices and the company's good position in the global DRAM market. The upgrade also reflects our view that Hynix's business volatility has decreased modestly in a more consolidated DRAM industry, despite still-high industry risk.

We expect more disciplined supply additions and rising demand from mobile devices, cloud services, and products related to Internet of Things (IoT) will support favorable memory chip prices and the company's strong profitability over the next one to two years. We believe supply-side risk has been lowered in the global DRAM market because there are only three major players (Samsung Electronics, Hynix, and Micron Technology) and they do not have an overly aggressive near-term DRAM capacity addition plan.

We expect Hynix's operating performance will be less volatile in future industry cycles because of the industry consolidation and the company's strengthened No. 2 position in the global DRAM market. Hynix has been resilient to the weak market conditions by generating steady operating profit and materially outperforming its closest peer, Micron, during the recent downcycle, from late-2015 to mid-2016. This is despite our view that Hynix's NAND flash memory business remains a relatively weak part of its business portfolio with significant potential volatility due to high capital intensity and intensifying competition.

We see industry risks from aggressive investments by new Chinese players with strong government support in the longer term. However, we believe this impact will be limited over the next one to two years because of the high entry barriers and rapid technological developments.

Given our expectation of strong and stable operating performance, we project Hynix to continue to maintain its solid financial metrics with an adjusted debt-to-EBITDA ratio of 0.1x-0.3x over the next two years. We expect the company will make significant annual capital investments of about Korean won (KRW) 7 trillion over the next two to three years, focusing on strengthening its competitiveness in the rapidly growing 3D NAND technology. However, we believe Hynix will be able to fund most of the investments internally through its strong operating cash generation, while maintaining relatively disciplined policies on mergers and acquisitions and dividends. We estimate Hynix to generate modestly positive discretionary cash flows over the next one to two years under our base-case scenario.

We believe Hynix's strong credit metrics, which it has sustained over the past several years including the recent downcycle, are evidence of the company's relative strength in its financial risk profile. As a result, we have revised our assessment of comparable rating analysis on Hynix to neutral from negative, resulting in an upward revision of the stand-alone credit profile (SACP) to 'bb+' from 'bb'.

We rate Hynix one notch higher than its 'bb+' SACP because we view the company as a moderately strategic subsidiary of SK Telecom Co. Ltd. (SKT; A-/Stable/--). We believe SKT would provide Hynix with a moderate degree of extraordinary financial support if the subsidiary were to face financial distress. SKT and Hynix maintain close ties by sharing core resources such as the group's brand name, senior management, and human resources functions.

However, SKT currently owns just 20% of Hynix, and the direct business relationship between the two companies is very limited.

The stable outlook on Hynix reflects our expectation that the company will maintain strong operating performance with stable financial metrics over the next one to two years mainly due to its good position in global DRAM market.

We could lower our rating if an unexpectedly severe downturn in the global semiconductor industry, a deteriorating competitive position, or delays in technology developments significantly weaken profitability and operating cash flows, resulting in adjusted debt to EBITDA approaching 1.5x. Also, the ratings could come under downward pressure if the company's growth strategy and financial policy become significantly more aggressive than we factor into the current rating or if weakening ties between Hynix and its parent, SKT, cause us to reassess our view of Hynix's strategic importance to the parent.

We see limited upside potential over the next 12 months mainly because of the company's ongoing significant capital expenditures and industry inherent volatility.

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