Another chipmaker and more strong numbers. SK Hynix is the latest to support a belief that this time, it really is different. That phrase is typically a recipe for disaster prognostication but there are reasons to think that memory chip producers, long a case study in value-destroying market share battles, have changed.
SK Hynix is world number two in D-Ram chips, used in computers and increasingly in mobile phones and tablets, and one of the four that dominate Nand, the memory form that benefited most from the smartphone boom. Its operating margins jumped from 11 per cent at the start of this year to 29 per cent in the latest quarter - helped by a fire at its Wuxi plant early last month that depleted supply and hence fuelled global Nand prices. Last week, Samsung Electronicsreported a near-doubling of its chip operating margins in a year.
Before, such recoveries have been followed by overconfident capital investment, overcapacity and slumping prices. But dynamics have changed. A decade ago, there were 12-plus D-Ram producers, but by this year, that had shrunk to three: Samsung, SK Hynix and Micron . Nand has four - with Toshiba in partnership with Sandisk joining the list. Fewer players make for a more rational market, borne out by their comments suggesting no plans for big, destabilising capital expenditure. Critically, it no longer suits Samsung, the single biggest player, to use its cash in this way since the main beneficiaries of that would be its chip-dependent phonemaking rivals, namely Apple. And barriers to entry are rising as technology grows more complex. The cost of building next-generation facilities has risen 50 per cent over five cycles of cutting-edge D-Ram technology, according to Bernstein research. Upgrading plants costs one-third of that, but it has doubled over those cycles.
SK Hynix's 27 per cent share gain this year has sharply outperformed the flat South Korean market and leaves it trading at two times its book value, just a little above its long-term average. But if this time really is different, then that premium to its assets could be justified.
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