2011 will be a watershed for Hynix

The odds are in favor but bumpy road ahead

By Kim Jae-kyoung

In 2008, global memory chip manufacturers, including Hynix Semiconductor, were deeply involved in a game of chicken to squeeze out their competitors, which then yielded no winner in the cutthroat competition.

Amid the global economic slump, companies overproduced chips in an effort to win market share. But the over production backfired and only added to the deepening recession of the semiconductor market.

However, Hynix, the world’s No. 2 computer memory chipmaker, has emerged as the winner from the high-stakes chicken game by showing the best business performance last year through the bold investment and timely balance sheet restructuring.

It posted an operating profit of 3.27 trillion won in 2010, the largest amount in its history, on sales of 12.09 trillion won. Its net profit also reached a record high of 2.65 trillion won. This is in a sharp contrast to the firm suffering net losses of 4.74 trillion won in 2008 and 333 billion won in 2009.

With the robust performance, it also shored up its financial soundness by reducing its debt by more than 1 trillion won and maintaining its cash reserve level at over 2 trillion won. The company has planned to further reduce its debt level this year.

What’s behind the Hynix’s outstanding performance was a strategic decision on capital spending based on improvement in profitability. The firm invested a total of $3 billion (3.4 trillion won) on capital expenditure in 2010, the second-largest following Samsung Electronics.

The widening gap in capital expenditure is caused by polarization in profitability among DRAM manufacturers. The trend has been deepening since 2008 when the chip industry played a game of chicken.

Given that profitability deteriorates without timely investment and this then leads to worsening competitiveness, those unable to make bold investment are likely to face a forced exit from the market.

In this regard, the odds are highly in favor of Hynix going forward. It is widely expected that the company will continue to post black-ink figures this year on the back of an improvement in the supply-demand situation.

“The global DRAM market has already hit rock-bottom and is showing gradual recovery. NAND flashes will experience some corrections, however, we expect the overall market to grow from the latter half of this year,” Hynix CEO Kwon Oh-chul said in an interview with BusinessFocus.

The stellar performance has been priced in its shares. Hynix shares closed at 32,500 won per share on April 6, the highest level this year, pushing up the market capitalization to its all-time high. “Our market cap has reached the 20 trillion won level, the largest amount since the founding of Hyundai Electronics, a precursor of Hynix. We also made the first-ever dividend payout,” he said.

At this year’s shareholders meeting on March 30, the company decided to pay a dividend of 150 won per share of common stock to shareholders. The total amount was 88.5 billion won. He expressed his intention to continue to pay cash dividends this year.

“Although it is desirable to reinvest all of earnings surplus, it is also important to return part of our profits to shareholders if our business continues a robust performance. However, since our business is volatile and cyclical, I cannot promise to pay out dividends every year,” he said.

Bumpy road ahead

The year 2011 will be a watershed for Hynix as it has to prove that the last year’s good result was not an one-off but a sustainable one. It should manage to maintain a delicate balance between growth and stability, the only way that it can avoid a rocky path and gain more market share.

Despite the dramatic turnaround, Hynix is facing a bumpy road ahead in its move to expand global market share due to lingering uncertainties both at home and abroad, including the Korean won’s sharp appreciation against the U.S. greenback.

The won is gaining ground fast, pushing up the exchange rate to below the level of 1,100 won per the dollar, raising concerns that the strengthening value of the won will erode the competitive edge of local exporters.

CEO Kwon himself feels uneasy about the pace of the won’s rise. “Korea has heavy dependence on exports and many industries are vulnerable to the movement of the exchange rate. We expected the won-dollar rate to hover at 1,100 won in the first half and 1,050 won in the second half. The rate is now already approaching the level (1,050 won). I’m deeply concerned,” he said.

The 53-year-old CEO hinted the rate is nearing the bottom line at which Hynix can endure. “Simply speaking, when we export $10 billion, a 10 won decrease in the rate can reduce our exports by 100 billion won,” he said.

“Given many of our assets and transactions are termed in dollars, the impact can be halved. Nevertheless, the sharp rise of the won can have a huge impact on our business,” he added.

Lingering external uncertainties triggered by unexpected events, such as turmoil in the Middle East and the aftermath from the Japan earthquake are also expected to affect the chip manufacturer by dampening global demand.