SK Hynix, which seemed quite risky financially until just three months ago, has bottomed out in terms of performance. No, we made a deficit of 3 trillion won again, but you can ask ‘why did you hit the bottom’. But if you look at the company from a financial and cash flow perspective, you’ll change your mind. In April, about
three months ago, <Numbers> analyzed SK Hynix’s exchangeable bonds worth KRW 2.2 trillion in line with the semiconductor industry and delivered them to readers. The summary of the analysis ) is as follows. 1. SK Hynix’s issuance of exchangeable bonds proves that the company is unable to afford interest expenses. 2. In fact, as of the end of 2022, SK Hynix’s separate financial statement-based cash assets are only 2 trillion won. 3. SK Hynix is likely to knock on the corporate bond market whenever it needs money. At the time, this article caught the attention of readers. I personally received a few emails saying that I read it well. Looking back now, after a quarter has passed, it seems that what I analyzed in this article was not very wrong. But one thing’s for sure… In conclusion, ‘Scenario 3’ is wrong.
At that time, for some reason, I looked deeply into the financial statements of SK Hynix and thought that corporate bond issuance would increase more frequently. At least so far, SK Hynix is not issuing additional corporate bonds.
And looking at SK Hynix’s financial situation right now, it seems that it will not issue new corporate bonds other than issuing refinancing of corporate bonds with maturities returning among existing corporate bonds. In other words, the scenario number 3 predicted by Numbers has been missed so far.
Three reasons why SK Hynix will not issue new corporate bondsFirst of all, I would like to express my understanding to those who read my article last April and set the direction for their investment. At least it was unexpected.
However, it seems that we need to think together about ‘why we judged wrongly’ .
. . . . . . . First of all, SK Hynix’s position
on the additional issuance of corporate bonds comes from the 2nd quarter earnings conference call on the 26th.
Q.. What is the funding and investment plan? “Investments to meet customer demand for DDR5 and HBM3 products, which are rapidly growing this year, are being executed without a hitch, but the company-wide investment scale is planned to be reduced by more than 50% compared to the previous year.Cash flow is expected to continue to improve in the second half, as sales increase from the quarter and cash expenditures such as investments are limited.Therefore, there are no plans for large-scale financing as in the first half, other than issuance of partial debt refinancing, for fund management in the second half. We will respond flexibly accordingly.” – 2023.07.26. Woohyun Kim , CFO of SK Hynix , during SK Hynix conference callSK Hynix has a total of 900 billion won in debentures and CPs maturing by 2024 . In addition, in February 2025, you will have to pay the balance of the acquisition of Intel’s NAND division ($ 2.235 billion, about 2.8 trillion won).
This means that a total cash outflow of 3.7 trillion won can occur within the next two years, but it has announced that it will not issue new corporate bonds.
SK hynix’s reasons for not issuing new corporate bonds other than issuance of refinancing can be summarized into three major factors.
1. We plan to maintain a reduction in investment by more than 50% compared to the previous year.2. Sales have been increasing since the second quarter.3. Cash flow in 2H will improve.Let’s see if each of these factors is correct.
SK Hynix 2Q Performance/Financial Analysis: ①Investment & SalesThe first factor, the reduction in investment , was expected, but its power was somewhat overlooked. Look at the table below.
Acquisition of tangible assets is data that intuitively shows how much SK Hynix invests in facilities each quarter.
Looking at it, it is confirmed that the investment in tangible assets, which reached 5.2 trillion won in the first quarter of 2022, decreased to 1.9 trillion won in the second quarter of 2023. In just six quarters, we reduced our investment by 63.1%. You can see that they’ve been slowing down their investments considerably lately. It was difficult to predict that SK Hynix, which
was likely to invest close to 20 trillion won per year, would reduce its investment to 1 trillion won per quarter. From this point of view, it is confirmed how much austerity has recently shifted. Let’s also look at the second factor: increased sales.
For a company like SK Hynix, increasing sales is as important as profitability. And SK Hynix’s sales , which peaked in the second quarter of 2022, bottomed out in the first quarter of last year.
An increase in sales means that more products are sold compared to the previous year, and at the same time, it means that ‘passing on the price’ to customers is attached. And the fact that the price is passed on means that future performance improvements are almost certain.
The reason is that the semiconductor industry is a ‘cycle industry’. Look at the graph below.
SK hynix’s gross profit margin and operating margin trend began to rise. The meaning of ‘performance has hit the bottom’ is clear as it repeats performance improvement and deterioration according to a large cycle.
And number three, cash flow changes are very important. Let’s break it down into a separate paragraph.
SK hynix 2Q earnings and financial analysis: ② Cash flow
In the midst of paying an operating loss of 2.882 trillion won and a net loss of 2.988 trillion won in the second quarter of 2023, it is confirmed that cash increased by 17.2% compared to the previous quarter.
However, a question arises here.
Isn’t cash flow still bad on separate financial statements? This content was the key reason that SK Hynix’s financial situation could be dangerous
in the content released last April . In fact, as of the end of the first quarter of last year, the company’s cash and cash equivalents stood at KRW 1,093.7 billion. It decreased by 600 billion won compared to 1.6374 trillion won in early 2023. However, considering that cash increased on a consolidated basis at the end of the second quarter, it is reasonable to assume that cash also increased on a separate basis. In addition, the aforementioned KRW 1.1 trillion in cash in the separate financial statements does not reflect the increase in cash (KRW 2.2 trillion) resulting from the issuance of exchangeable bonds in April . It was precisely this factor that drove the company’s cash increase on a consolidated basis in the last two quarters.
The reason why operating cash increased despite a 3 trillion deficit: Depreciation and working capitalAnother thing to look at from a similar perspective is cash flow from operating activities.
SK Hynix recorded a loss for three consecutive quarters, but the quarterly operating cash was negative only once in the last quarter. And even as the deficit in the second quarter grew larger, operating cash flow turned positive.
The first reason for the increase in operating cash flow is depreciation and amortization.
From an operating profit/loss perspective, depreciation is strictly a cost factor. When the company builds the factory, it does not process the cost, and later, in the process of using the asset, the cost is paid in installments.
However, when actually building a factory, of course money goes into it. Therefore, in accounting, depreciation is treated as an expense every quarter, but from a cash flow point of view, it becomes ‘money that has already been spent and returned’. Even though SK Hynix posted a deficit of 3 trillion won for two consecutive quarters, it is actually doing ‘surplus business’.
The second reason for the increase in operating cash flow is working capital, which has turned positive.
Working capital worth 3 trillion won in the first quarter of last year turned negative by 800 billion won this quarter.
Working capital is trade receivables and inventories minus trade payables. From the point of view of ‘increase and decrease’, the fact that it was negative in the first quarter and turned positive in the second quarter can easily be seen as meaning that the company’s inventory decreased and money began to flow while receiving the money to be received.
< Changes in working capital of SK Hynix in the first and second quarters of 2023> Trade receivables: KRW 4.227 trillion → KRW 4.487 trillion (up by KRW 260 billion)Inventory: KRW 17.182 trillion → KRW 16.42 trillion (down by KRW 762 billion)Trade payables : KRW 1,746 billion → KRW 1,882 billion (increase by KRW 136 billion)
Inventories decreased by 762 billion won. The success in controlling the enormously increased inventory contributed to the reduction in working capital.
As cash flow is rising again, there seems to be no reason for SK Hynix to increase borrowing. So, from this point on, we will talk about whether the current borrowing is excessive.
Why Debts Exceeding 30 Trillion Won Are Not a Burden on
SK HynixIt seems that there are voices of concern about SK Hynix’s large-scale borrowings recently . The increase in debt to 30 trillion won is definitely a burden factor. This is because the company’s annual interest expense alone has reached more than 1 trillion won.
But strictly speaking…
SK Hynix’s rapidly increasing debt does not seem like a big problem.
30 trillion won in debt and 1 trillion won in annual interest expenses seem substantial when you look at the simple amount. However, as long as the interest burden is not enough to strangle SK Hynix. Looking at SK Hynix’s annual operating profit and financial profit and loss
in the past .
Although operating profit and loss fluctuate every year, SK Hynix has the ability to generate an operating profit of more than 10 trillion won every year during the super cycle. Compared to that, financial gains and losses of around 1 trillion won per year are not great토토사이트. Also, it is not ‘interest’ but ‘exchange rate’ that actually affects the company’s financial profit and loss.
Moreover, unless there is a major shock to the bond market like the ‘Legoland Incident’ in October last year, it is actually not difficult for a company like SK Hynix to raise large-scale funds.
In conclusion, I don’t think there is a need to place a lot of weight on borrowings that have exceeded 30 trillion won.
Analysis of SK Hynix’s KRW 1.12 trillion water treatment center saleAnd SK Hynix now has one more reason not to knock on the bond market. It secured a whopping KRW 1 trillion in cash by selling the company’s non-operating assets. ( 10-year lease after sale of water treatment center to SK Hynix and SK Ritz for KRW 1.12 trillion )
Personally, I thought of this choice as a ‘trick’. Let’s go through the details.
. . . . . . .
Various chemicals are used in semiconductor manufacturing, and a large amount of water is required to wash them off. This is why semiconductor factories are built near rivers.
However, as the environment is polluted if the water is discharged as it is, manufacturers build large-scale water treatment facilities near factories to purify the water, reuse it, and discharge it. In fact, in the case of SK Hynix, the amount of discharge compared to the amount of water intake reaches 80%.And in September, SK Hynix will sell the water treatment center at its semiconductor plant in Icheon, Gyeonggi-do to its affiliate SK Ritz for 1.12 trillion won. At the same time , SK Hynix signed a contract in the form of a responsible lease of this asset for up to 20 years in the future.
Originally , SK Hynix leased the water treatment center to its 100%-owned subsidiary, SK Hyeng, and earned 100 billion won worth of rental income every year. SK Hynix sells it to SK REITs and at the same time makes a responsible lease. At the same time, we rewrote a contract in the form of a ‘sublease’ that maintains the lease agreement with SK Hi-ENG.
Rental income will decrease by tens of billions of won every year, but the company has been able to fill the cash balance that seemed uneasy.
Aside from the transaction structure and cash expansion, the part that was personally fascinating was SK Hynix’s press release .
The money secured through the sale of assets is not to expand financial soundness, but “plans to use it for technology development and future industry investment.”
It may be a formal remark, but even if there is no money of 1 trillion won secured right away, I think that SK Hynix does not need to fill in more ‘buffers’ to strengthen financial soundness.
Conclusion:
SK Hynix, it seems that the time to worry about finances is overBased on SK Hynix’s recent performance announcement, we checked the company’s financial capabilities. A three-line conclusion.
1. SK Hynix’s performance hit the floor, and operating cash flow also turned to black in one quarter.
2. On top of this, we have recently secured additional funds through the sale of non-operating assets worth KRW 1 trillion.
3. Under the assumption that the ‘downcycle’ in the semiconductor market will soon normalize, borrowings of up to 30 trillion won do not appear to be a significant burden factor.
SK hynix has prepared for business risks by reducing spending and issuing corporate bonds. Here, as the semiconductor industry quickly normalizes, the short-term risk seems to have passed. I wonder if the company’s financial capabilities are required to minimize the risks that will arise in this way.