SK Hynix to buy back ex-foundry unit after strong Q3 results

SK Hynix Inc. will be buying back the remaining stake in its former unit Key Foundry to double its foundry capacity, after its third-quarter operating profit soared to its highest levels in three years.

The world's No. 2 memory chipmaker will reach an agreement this week to acquire a 50% stake plus one share in Key Foundry from a domestic private equity fund, according to electronics industry sources on Oct. 26.

SK Hynix has another 49% stake in the foundry company dedicated to 8-inch wafers. The upcoming deal would value the former Hynix unit at about 600 billion won ($514 million), and double the chipmaker's foundry capacity to 200,000 pieces per month.
 
Back in 2004, SK Hynix sold Key Foundry due to financial difficulty. Key Foundry is a spinoff of the foundry division of Magnachip, which itself was spun off from Hynix Semiconductor, the predecessor of SK Hynix, in 2004. Magnachip was created after the former Hynix operations were sold to Citigroup’s venture capital arm.

SK Hynix's non-memory business at a glance:

	Year
LG Semiconductor Inc. was launched	1979
LG Semiconductor was absorbed into Hyundai Electronics and renamed Hynix Semiconductor	1999
Hynix spun off non-memory chip operations into Magnachip Semiconductor	2004
Magnachip Semiconductor spun off and sold the foundry facility in Cheongju, North Chungcheong Province, to Magnus PEF for 510 billion won. The foundry facility was renamed Key Foundry. At the time, SK Hynix invested 200 billion won in the PEF.	2020
Note: Magnus PEF is a joint fund between two Seoul-based PE firms -- Alchemist Capital Partners and Gravity Private Equity

RECORD SALES, SHIPMENT GROWTH

On Tuesday, SK Hynix posted a 220% surge to 4.2 trillion won in third-quarter operating profit compared to the year-earlier period. It was the first time the company's quarterly operating profit reached the 4 trillion won level since the fourth quarter of 2018, when it posted a record 4.4 trillion won.

Sales leapt to its highest-ever 11.8 trillion won for the July-September quarter, up 45% year on year.

Buoyed by the robust quarterly results, SK Hynix will ramp up its shipments from the current quarter by a mid- to high-teen percentage for DRAM chips and by a double-digit percentage for NAND flash chips compared to the third quarter, the company said during its third-quarter earnings call.   

"Demand for memory chips for servers and smartphones will likely remain stable," SK Hynix Chief Financial Officer Roh Jong-won told the conference call.

"But if inventory-related issues emerge or negotiations with buyers face an unexpected stumbling block, we will be able to flexibly adjust our shipments just as we did in the third quarter."  

SHIPMENT ADJUSTMENT, NAND CHIPS AND WEAKER WON

Hynix cut its DRAM chip shipments by more than 10% in the third quarter versus three months before, which pushed its average selling price higher by nearly 10%, Roh said.

Amid the prolonged global shortages of semiconductor chips, demand for PC DRAM chips declined in the third quarter. Some customers tapped their chip inventories, instead of placing new orders.

In response, Hynix adjusted shipment quantities to keep its product prices stable to higher.

Its earnings got another boost from the NAND flash memory chip business, which swung to a quarterly profit, snapping 11 consecutive quarters of operating losses since the fourth quarter of 2018.

Last October, SK Hynix agreed to buy Intel's NAND memory and storage business for $9 billion. The cross-border acquisition is pending approval from China, after seven other major export countries gave a nod to the deal. CFO Roh said the company is aiming to close the acquisition within the year.

	Q3 2021 (year on year)	Quarter on quarter	Previous record
Sales	11.8 trillion won (up 45%)	up 14%	11.4 trillion won in Q3, 2018
Operating profit	4.2 trillion won (up 220%)	up 55%	4.4 trillion won in Q4, 2018

SK Hynix has increased the proportion of its flagship product 128-layer 4D NAND to 75% of its NAND flash chip production, after it started mass production of the chips in mid-2019. The 128-layer chips cut costs by reducing the total number of manufacturing processes, while the company also boosted production yields by cutting the ratio of defective products, Roh added.

Moreover, the softening won generated foreign exchange gains of 400 billion won for Hynix as the weaker won lifted the conversion value of export settlements. Its cash and cash equivalents swelled to 10 trillion won as of end-September, up 3.4 trillion won versus the previous quarter.

Write to Jun-ho Cha and Hyung-suk Song at chacha@hankyung.com
Yeonhee Kim edited this article.