(The following statement was released by the rating agency)
Oct 19 -
Summary analysis -- SK Hynix Inc. --------------------------------- 19-Oct-2012
CREDIT RATING: BB-/Stable/-- Country: Korea, Republic
Primary SIC: Computers,
Mult. CUSIP6: 449130
Credit Rating History:
Local currency Foreign currency
14-Feb-2012 BB-/-- BB-/--
26-Dec-2008 B+/-- B+/--
The ratings on Korea-based semiconductor maker SK Hynix Inc. (Hynix; BB-/Stable/--) reflect highly cyclical conditions in the semiconductor industry, the company’s ongoing capital expenditure requirements, and the challenge of keeping up with rapid advances in technology. Offsetting these negative factors are the company’s solid position in the global market for dynamic random access memory (DRAM) and NAND flash memory, strong product development, good operating efficiency, and improved financial flexibility due to a recent increase in capital.
On Feb. 14, 2012, SK Telecom Co. Ltd. (SKT; A-/Stable/--) completed a Korean won (KRW) 3.4 trillion acquisition of a 21% stake in Hynix. Under the deal, Hynix issued 101.85 million new shares to SKT and received KRW2.3 trillion in equity capital. In our view, SKT’s acquisition of this major stake in Hynix and the increase in Hynix’s equity should improve Hynix’s capital structure and financial flexibility. Standard & Poor’s Ratings Services estimates the company’s debt to capital will improve to about 42% in 2012, from about 48% in 2011.
We assess Hynix’s credit quality on a stand-alone basis. We do not factor in explicit support from SKT, because there is little record of business and management integration between the companies. Progress in integration between SKT and Hynix, including sharing of the group’s core resources, will be key to our assessment of SKT’s potential support for Hynix. At this stage, we expect to limit to one notch any increase in the ratings on Hynix as a result of stronger support from the parent company.
Hynix maintains a solid position in the global semiconductor memory market. The company is the world’s second-largest supplier of DRAM chips, with about 23% of the global market, behind industry leader Samsung Electronics Co. Ltd. (SEC; A/Positive/A-1), which holds about 40% of the market. Hynix also maintains the fourth largest share of the world market for NAND flash, at about 11%. In the first half of 2012, about 70% of the company’s revenues came from its DRAM business.
We regard the company’s business risk profile as “weak,” reflecting considerable variability in operating performance and capital intensity. We believe the memory semiconductor industry is susceptible to overexpansion of capacity for DRAM and NAND flash, and this can produce rapid price declines and erode profitability of all market participants. In fact, Hynix made a KRW237 billion operating loss in the first half of 2012, owing mainly to weak global demand and low prices. However, we expect profitability to recover modestly in the second half of 2012 given increasing demand for Hynix’s mobile DRAM and NAND flash, mainly from growth in smartphone sales.
Hynix’s need to make continual large capital expenditures is another factor that constrains the ratings. For the five years to the end of 2011, Hynix invested an average of about 36% of its revenues in capital expenditure. Although the company is increasingly focused on migrating to advanced technology rather than boosting production capacity, we expect capital spending to remain over 35% of revenues for the next one to two years. Although Hynix’s financial flexibility has materially improved over the past year, large capital expenditures during the current downturn could increase pressure on the company’s finances in the coming one to two years, in our opinion.
Notwithstanding these challenges, Hynix is strong in product development, in our view. The company makes 20-to-40 nanometer DRAM, employing strong capabilities in chip design and proven operating expertise, albeit a degree behind those of industry leader SEC. Also, NAND flash and non-PC DRAM products such as those for mobile phones, servers, and graphics have generated growing shares of Hynix’s revenues, and we believe these businesses produce more stable and higher profitability than PC DRAM products.
We view the company’s financial risk profile as “aggressive” despite its strong measures of credit quality for its category. This mainly reflects its vulnerability in key measures of financial performance and high capital expenditure requirements. Debt to EBITDA for Hynix was about 2.0x in 2011, although it peaked at 7.8x in 2008. Given the volatility in the semiconductor industry, we expect measures of credit quality to vary widely over a cycle. For 2012, we expect Hynix’s debt to EBITDA to be 2.2x-2.5x.
We view Hynix’s liquidity as “adequate.” Our assessment of the company’s liquidity incorporates the following expectations and assumptions about the next 12 months:
-- The company’s sources of liquidity, including cash and funds from operations, will exceed 1.2x uses; and
-- Net sources will remain positive even if EBITDA declines more than 15%.
As of June 30, 2012, the company had about KRW3.0 trillion in cash and equivalents, compared with about KRW2.5 trillion in short-term debt.
The stable outlook reflects our expectation that Hynix’s solid position in the memory semiconductor market will enable it to maintain its operating performance and financial ratios in the next one to two years.
We may raise the ratings on Hynix in the event of the following:
-- Hynix and SKT demonstrate a record of business and management integration or financial support that strengthens ties between the companies;
-- Hynix significantly improves its market position in its core business, generating solid free cash flow on a sustainable basis.
On the other hand, we could lower the ratings in the event of the following:
-- We assess that Hynix’s growth strategy has become significantly more aggressive than we factor into the current ratings; or
-- Deterioration occurs in key financial ratios, such as debt to EBITDA in excess of 3.0x, likely as a result of an unexpectedly long downturn in the global memory semiconductor industry.