Hong Kong, October 23, 2018 -- Moody's Investors Service has upgraded SK Hynix Inc.'s issuer rating
to Baa2 from Baa3.
The rating outlook is stable.
RATINGS RATIONALE
"The upgrade reflects SK Hynix's improving business profile,
as well as our expectation that SK Hynix will maintain robust profitability
and strong financial metrics through the industry cycles,"
says Sean Hwang, a Moody's Analyst.
Moody's expects SK Hynix to gradually enhance its competitiveness
in the NAND flash business over the next 1-2 years, as it
accelerates its migration to high-density 3D NAND products and
increase its presence in high-end product categories, such
as solid state drives for enterprise customers.
At the same time, SK Hynix will maintain its solid position as the
second-largest supplier of dynamic random access memory (DRAM)
by revenue globally. This strength partly mitigates the company's
heavy reliance on this segment for profit generation.
Despite a potential softening from the peak level in 2018, SK Hynix's
operating margins should remain solid at around 40% in 2019,
against the backdrop of largely supportive industry fundamentals.
The restrained supply growth in the DRAM market — stemming from
industry consolidation and increasing challenges in technological migration
— and healthy demand for both DRAM and NAND will likely curb an
excessive fall in product prices.
Moody's expects SK Hynix's capital spending to increase to
about KRW17 trillion annually in 2018-19 from the KRW10 trillion
in 2017. Nonetheless, its robust annual operating cash flow
of around KRW20 trillion and moderate levels of shareholder distributions
should allow the company to continue generating positive free cash flow.
In this regard, and given the company's conservative financial
policy, SK Hynix's financial metrics will remain strong over
the next 12-18 months, with a net cash position and adjusted
debt/EBITDA below 0.5x. This financial strength supports
its Baa3-level standalone credit profile and mitigates its exposure
to the capital-intensive and cyclical nature of the memory chip
industry.
SK Hynix's issuer rating continues to incorporate a one-notch uplift
from the company's standalone credit strength, reflecting
Moody's expectation of financial support from SK Hynix's largest shareholder,
SK Telecom Co., Ltd. (A3 negative), in case
of need.
The stable rating outlook reflects Moody's expectations that SK Hynix
will maintain its solid position in the DRAM market — without material
disruptions in supply and demand dynamics — improving competitiveness
in the NAND business and keeping financial leverage low, despite
large capital spending.
Moody's could upgrade the rating over time if SK Hynix: (1)
significantly improves its market positions and narrows its technology
gap with the industry leader Samsung Electronics Co., Ltd.
(Aa3 stable), (2) sustains strong profitability and positive free
cash flow over the next industry cycle, and (3) maintains conservative
financial management, including a net cash position.
Moody's could downgrade the rating if the company's credit profile
deteriorates, owing to: (1) a significant erosion of its market
positions or delays in technological migrations, or (2) a weakening
in financial metrics due to reduced profitability, aggressive investment
or shareholder distribution policies, such that adjusted debt/EBITDA
stays above 1.0x on a sustained basis.
In addition, an adverse change in the relationship between SK Hynix
and SK Telecom could result in a negative rating action.
The principal methodology used in this rating was Semiconductor Industry
published in July 2018. Please see the Rating Methodologies page
on www.moodys.com for a copy of this methodology.
SK Hynix Inc., a Korea-based company, is engaged
in the design, manufacture and sale of memory chips, such
as DRAM and NAND flash memory. DRAM accounted for 80% of
SK Hynix's revenue in H1 2018, followed by NAND at 19%.
The company is 20.07%-owned by SK Telecom Co.,
Ltd.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Moody's considers a rated entity or its agent(s) to be participating
when it maintains an overall relationship with Moody's. Unless
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the rated entity is participating and the rated entity or its agent(s)
generally provides Moody's with information for the purposes of
its ratings process. Please refer to www.moodys.com
for the Regulatory Disclosures for each credit rating action under the
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Policy for Designating Non-Participating Rated Entities.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
The first name below is the lead rating analyst for this Credit Rating
and the last name below is the person primarily responsible for approving
this Credit Rating.
Sean Hwang
Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
