Fitch Revises SK Hynix's Outlook to Positive

Mon May 27, 2013 1:17am EDT

(The following statement was released by the rating agency) SEOUL, May 27 (Fitch) Fitch Ratings has revised Korea-based SK Hynix Inc.'s (Hynix) Outlook to Positive from Stable. The agency has affirmed the company's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs), as well as its senior unsecured rating, at 'BB'. Key Rating Drivers Favourable operational outlook: The revision of the Outlook to Positive from Stable reflects Fitch's view that Hynix will benefit from the tighter supply-demand balance following the merger of Elipda Memory Inc. and Micron Technology Inc., the world's third and fourth largest dynamic random access memory (DRAM) makers respectively. In addition, the second-tier Taiwanese makers' gradual exit from commodity DRAM is positive for Hynix, as pricing pressure should reduce. However, Hynix's market position may be pressured if Elpida-Mircon benefits from an increased scale after the merger. Positive developments expected: We believe that Hynix will continue to benefit from more stable chip prices in 2013 given a tighter supply of commodity DRAM due to DRAM makers' gradual capacity reductions. In addition, demand for mobile and server DRAM remains solid. Fitch forecasts that Hynix's EBIT margin will remain in line with its Q113 level of 11% in 2013. (2012: -2%) Leverage to improve: Fitch forecasts Hynix's funds flow from operations (FFO)-adjusted leverage will remain below 2x in the short to medium term (2012: 2x) as improved profitability and conservative capex will lead to positive free cash flow (FCF). Cyclicality still key risk: While we believe improvements in the supply-demand balance will reduce cash flow volatility, the memory semiconductor industry will remain exposed to cyclicality which will continue to be a key weakness in Hynix's credit profile. If market dynamics do not improve as we expect or if the company's market position weakens, the Outlook will be revised back to Stable. Support from SKT: Hynix's ratings are a notch above its standalone level of 'BB-' to incorporate the implied support from SK Telecom Co., Ltd. (SKT, A-/Stable) with its 21% ownership of Hynix. Fitch believes that Hynix is an important asset for the SK Group. Rating Sensitivities Negative: Future developments that may, individually or collectively, lead to negative rating action include - - FFO-adjusted leverage sustains above 3x - Negative FCF on a sustained basis - An indication of weakening ties between SKT and Hynix Positive: Future developments that may, individually or collectively, lead to positive rating action include - - FFO-adjusted leverage below 2x - Positive FCF on a sustained basis - EBIT margins above 6% on a sustained basis - Indications of an eased volatility risk of the industry leading to a more stable credit profile for Hynix over the medium to long term Contact: Primary Analyst Alvin Lim, CFA Director +82 2 3278 8371 Fitch Ratings Limited, Korea Branch 9F Kyobo Securities Building 26-4 Youido-Dong, Youngdeungpo-Gu Seoul Secondary Analyst Kelvin Ho Director +85 2 2263 9940 Committee Chairperson Steve Durose Senior Director +61 2 8256 0307 Media Relations: Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available at www.fitchratings.com. The issuer did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure. Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012, are available at www.fitchratings.com. Related Research: Rating technology companies - Sector credit factors (August 2012) Applicable Criteria and Related Research: Corporate Rating Methodology here Rating Technology Companies here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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