Long-term contracts with 14 customers… More than half of production capacity secured between 2027 and 2028, DRAM and HBM virtually sold out by 2029… Shareholder return this year: approximately 100 trillion won
SK Hynix (000660) predicts that virtually all of the DRAM and high bandwidth memory (HBM) it will produce by 2029 will be sold. As investment in artificial intelligence (AI) data centers is rapidly increasing, global big tech companies are securing memory in advance that will be used in the next few years. Operating profit in the third quarter of this year exceeded 83 trillion won, and the operating profit ratio was close to 80%.
SK Hynix announced in a conference call announcing its third quarter earnings on the 28th that, combining the long-term supply contracts already signed and the demand being negotiated by customers, DRAM and HBM are virtually sold out by 2029.
The sales price and contract terms for all quantities have not been confirmed. Since the customer's specific purchase plan is added to the confirmed contract, the company believes that the demand under negotiation is highly likely to lead to an actual contract.
Currently, long-term supply contracts have been signed with 14 major customers, including global cloud service providers (CSPs). The contracted volume corresponds to more than 50% of the total production capacity in 2027 and 2028. Buyers have already been determined for a significant portion of the memory to be produced over the next two years.
#### Competition to dominate memory, prices are flexible even with long-term contracts
The competition among global big tech companies to secure memory is expanding to investment in production facilities.
Reuters previously reported that major customers proposed SK Hynix to invest in production lines or support the cost of purchasing expensive manufacturing equipment. The plan is to engage in investment in semiconductor production facilities to ensure a stable supply of memory needed for data center expansion.
SK Hynix also established a condition that guarantees actual purchases by customers in long-term contracts. While increasing the possibility of contract fulfillment through deposits, etc., the supply price was made to reflect market conditions within the range agreed upon with the customer.
In a situation where memory prices continue to rise, there is no need to keep the selling price low just because you have signed a long-term contract. How much you sell it for is just as important as how much you sell it for.
SK Hynix predicted that the memory supply shortage will continue until 2030 as AI investment spreads from big tech to general companies and countries. As the technical difficulty of cutting-edge processes increases and it takes a considerable amount of time to build a new factory, it is difficult to increase production capacity in a short period of time.
#### Operating profit exceeds 83 trillion won... Expansion of HBM4 supply
As memory prices rose and sales of high-value products increased, SK Hynix's profitability also improved sharply. Consolidated sales in the third quarter were KRW 104.6155 trillion and operating profit was KRW 83.3338 trillion, up 327.9% and 632.1%, respectively, compared to the same period last year. The operating profit margin reached 79.7%.
It also exceeded market expectations. LSEG's operating profit estimate cited by Reuters was 76.7 trillion won, and actual performance was about 8.6% higher than this.
Operating profit per 100 won of sales amounted to about 80 won. The semiconductor manufacturing industry incurs enormous fixed costs in factories and equipment, but profits can increase quickly if product prices rise after production facilities are established. In addition, sales of high value-added products such as server DDR5 and HBM increased.
Unlike the sharp increase in operating profit, net profit decreased compared to the previous quarter. Net profit in the third quarter was 39.7756 trillion won, down about 58% from the previous quarter. This is largely due to the significant reflection of profits related to Kioxia investment in the previous quarter.
By product, shipments of HBM4, the 6th generation HBM, began in earnest, and sales of 321-layer TLC-based enterprise SSDs also increased in the NAND sector. SK Hynix predicted that HBM4 shipments and sales in the fourth quarter would exceed that of its existing flagship product, HBM3E.
To increase the supply of next-generation products, expansion of production facilities is also necessary. The company plans to expand its Cheongju M15X production capacity by the end of the year and increase facility investment next year in line with the operation of the first Yongin semiconductor cluster.
The record-high performance and investment returns will also be used to expand shareholder returns. SK Hynix plans to return approximately 100 trillion won to shareholders in fiscal 2026, including more than 30 trillion won in cash dividends and more than 60 trillion won in share repurchases and cancellations. The 40 trillion won share purchase announced in August was completed last week.
On this day, the board of directors decided to pay 14 trillion won in cash dividends and 20 trillion won in additional stock purchases for the third quarter. Of the new purchases, 10 trillion won will be incinerated, and the remaining approximately 10 trillion won will be used to compensate executives and employees. Treasury stock for executive and employee compensation is excluded from the shareholder return scale.
The third quarter dividend was 20,000 won per share, consisting of 10,000 won reflecting performance improvement and a special dividend of 10,000 won reflecting Kioxia investment profits. Net cash at the end of the third quarter reached 98.7 trillion won.
SK Hynix plans to expand production facilities in Cheongju and Yongin while securing customer demand until 2029. How long the semiconductor boom will last depends not only on the number of orders already secured but also on the price at which the increasing production volume is supplied.
