Chipmakers expected to turn to profit in Q4 thanks to AI

Major credit rating agencies and brokerages are upgrading their projections for Korean chipmakers Samsung and SK hynix. The semiconductor market is expected to rebound, driven by the growing adoption of generative AI and the demand for memory chips.

Memory chips will see high demand next year, as the markets for AI and web servers rapidly expand. Illustration by Kim Ji-yoon. [KIM JI-YOON]

Major credit rating agencies and brokerages are upgrading their projections for Korea's major chipmakers like Samsung and SK hynix, whose chip business are expected to turn profits in the fourth quarter following multibillion dollar losses.

S&P Global Ratings upped its prospects for SK hynix from negative to stable, as the semiconductor market will likely rebound, centering around high-performing memory chips, thanks primarily to the growing adoption of generative AI.

“The stable outlook is based on our expectation that SK hynix will meaningfully improve its profitability and credit metrics over the next six to 12 months such that its debt leverage will drop below our threshold of 2x for the current rating,” S&P said in a statement released Thursday.

“The company's solid position in the HBM [high bandwidth memory] business, expanding market share in the DRAM business, and a recovery in the memory chip industry cycle will drive such improvement,” it said.

The positive forecast comes amid estimates that the two companies’ total operation profits for 2023 have reached a 15-year low.

The financial investment industry raised its fourth-quarter earnings forecast for Samsung Electronics and SK hynix, the two largest Korean companies in the memory chip industry, on Dec. 11. Many predicted that the two companies would not only turn a profit in the first quarter of next year, but also enter the boom stage of the business cycle to earn annual operating profits worth 10 trillion won ($7.6 billion).

Some analysts forecast that SK hynix will break out of its four consecutive quarters of operating deficits and enter the black with 100 billion won in profits in the fourth quarter this year.

In particular, analysts predict that increased demand for HBM and DDR5 chips will cause a memory chip boom.

The two products listed above are essential in the making of AI chips and in operating high-performing servers.

Samsung Electronics and SK hynix, two of the “big three” companies along with Micron Technology that produce DRAM chips, make up more than 80 percent of the DRAM market. This makes it likely that the benefits from the rise in demand will largely accrue to those two companies.

The AI chip market, which acts as a “reservoir” for high value memory chips, is expected to grow to more than nine times its current size by 2027. U.S.-based leading AI chipmaker Nvidia’s accelerator H100, as well as rival AMD’s MI300 series, which was released on Dec. 6 as a counter to the H100, are rumored to be using HBMs from Samsung Electronics and SK hynix.

One chip contains four to eight HBMs. Google, Amazon and Microsoft have also started constructing high-performing computing systems in preparation for active development of AI next year. All of the above require next-generation memory chips.

The memory chip market, which previously centered around high-volume, low-variety production and creating general purpose products, is changing along with the HBM and DDR5’s entrance.

HBM has a large data storage capacity due to its multi-stacked DRAM structure, and is also five times more expensive than general DRAMs.

With the robust demand expected for those high-end lineups, SK hynix will likely increase next year's capital expenditures to about 14 trillion won from 8 trillion in 2023, according to S&P.

SK hynix is rumored to have recently made a profit margin of nearly 30 percent from its sales of high-capacity DRAM for servers, including HBM. That is more than twice the average profit margin for memory chips made this year.

“Should they succeed at inventory control, the two companies will be able to quickly regain a record profit margin of over 50 percent next year,” said a source from the semiconductor industry.

Market prices have also gone up. Fixed contract prices for the DRAM and NAND Flash, which were on a downward hill for two years, have risen for two consecutive months.

The average fixed contract price for the Double Data Rate 4 (DDR4), a general-use DRAM, increased 19.2 percent from 1.3 dollars in September to 1.55 dollars last month. Prices for the NAND Flash for general use also reached four dollars after nine months.

“The market has turned so that the ‘supplier has the advantage’ due to the normalization and subtraction of retail inventory,” said Park Yoo-ak, an analyst at Kiwoom Secuirities.

Shares also rose for Korea's two chip giants. Samsung Electronics rose 0.27 percent to 73,300 won, while SK hynix gained 2.41 percent to 140,000 won from the last trading session as Friday’s market closed.

[AHN DA-YOUNG]

U.S.-based market researcher Gartner has forecast the memory chip market to grow by 66.3 percent next year on the back of increasing demand for AI servers. The World Semiconductor Trade Statistics estimates that the memory chip will grow by 40 percent next year to $130 billion.

“Samsung and hynix will take away over 80 percent of the new supply for high-value DRAMs,” said Kim Joung-ho, professor at KAIST’s School of Electrical Engineering. “As the market for next-generation memory [chips] has just opened, we must ensure that we grasp the upper hand in technology,” Kim added.

BY LEE HEE-KWON,KIM JU-YEON [kim.juyeon2@joongang.co.kr]