Bullish on HBM business, Bank of America's "Five Reasons" to be optimistic about SK Hynix

On October 11th, Eastern Time, Bank of America released a research report stating that it is optimistic about SK Hynix's HBM (High Bandwidth Memory) business prospects. It has given SK Hynix a "buy" rating and raised its target stock price from 240,000 Korean won to 280,000 Korean won.

There are five main reasons for this:

Market Share Growth: SK Hynix is gradually taking market share from Samsung Electronics in the HBM market, especially as Samsung's HBM3e technology is progressing slowly, giving Hynix an opportunity to catch up.

Significant Sales Growth: In the third and fourth quarters of 2024, SK Hynix's HBM sales are expected to reach $2.9 billion and $3.5 billion respectively, accounting for 32% and 38% of its DRAM sales, much higher than the 15% and 20% in the first and second quarters.

Technological Leadership: SK Hynix plans to be the first to mass produce 12-layer HBM products in the mid-fourth quarter of 2024, leading competitors and further solidifying its market position.

High Profit Margin Support: Hynix's HBM products have extremely high profit margins, with an expected operating profit margin (OPM) of over 60%, which will bring substantial profits to the company.

Stable Demand and Orders: Hynix has secured stable orders from NVIDIA, with a significant increase in shipments expected in 2025, and prices will remain stable. Although competitors may increase the supply of HBM3e, Hynix's product quality has been highly recognized by major U.S. companies such as Microsoft and Meta, ensuring that market demand will not be affected.

Bank of America believes that SK Hynix's HBM business is rapidly expanding, with HBM sales expected to increase from $2.3 billion in 2023 (14% of DRAM sales) to $9.2 billion and $15.8 billion in 2024 and 2025 (approximately 60% of the global market share). Due to Bank of America's expectations of increased sales volume and prices, HBM sales in 2025 have increased by 38% compared to previous expectations.

Strong Profit and Cash Flow Outlook for Hynix

Bank of America points out that thanks to its high-profit margin HBM business (with an operating profit margin of over 60%), SK Hynix's profit and cash flow outlook is very optimistic. It is expected that in the third and fourth quarters of 2024, SK Hynix's operating profit will reach 6.6 trillion Korean won and 6.7 trillion Korean won respectively, with profits in the first and second quarters of 2025 reaching 6.1 trillion Korean won and 6 trillion Korean won.

This helps offset the risks of the traditional DRAM memory business. As the cost competitiveness at Hynix's 1a and 1b technology nodes has been validated, even in a scenario of soft price trends, the traditional DRAM business can still achieve an operating profit margin of 30-40%.

Looking at the whole year, Hynix's operating profit in 2025 is expected to increase to 28 trillion Korean won, surpassing the historical record of 21 trillion Korean won set in 2018 and higher than the projected profit level of 22 trillion Korean won in 2024.

Furthermore, Bank of America states that the company's free cash flow (FCF) will significantly improve. During the period of 2024-2025, Hynix's free cash flow is expected to exceed 10 trillion Korean won annually. Initially, these funds will be used to repay debt, but after debt repayment, Bank of America expects the company to increase dividends and conduct share buybacks, in line with South Korea's "value enhancement" strategy Plan.

Stock Price Target Raised to KRW 280,000

Bank of America stated that the growth of SK Hynix's HBM business will be the main driver for its stock price increase. Although the earnings per share (EPS) forecast for 2024-2025 is only slightly raised by less than 10% due to DRAM price pressure, Bank of America expects SK Hynix's EPS to grow by 30% in 2025.

Based on SK Hynix's strength in the HBM business and the profit growth expectations for 2025, Bank of America maintains a "buy" rating for SK Hynix and raises the price-to-book ratio (P/B) for SK Hynix in 2025 from 1.9 times to 2.2 times, increasing the target stock price from KRW 240,000 to KRW 280,000