UBS reiterates Buy on SK Hynix, considers significant de-rating unwarranted

Overview

This report is UBS's company research and rating adjustment report on SK Hynix. Its core conclusion is that the recent sharp share-price pullback and valuation de-rating are unwarranted because demand related to AI servers, traditional servers, DDR5/LPDDR5, HBM, and NAND continues to strengthen, while long-term earnings and free cash flow prospects are not fully reflected in the share price. UBS maintains its Buy rating but lowers the 12-month price target from Won3.20m to Won3.00m.

Core views

UBS believes SK Hynix's long-term fundamentals remain solid. First, agentic AI is expanding from HBM into DDR5, LPDDR5, server CPU nodes, and NAND storage demand, driving continued acceleration in memory demand in 2027. Second, HBM consumes more front-end DRAM capacity, while incremental industry supply remains limited, helping to mitigate a traditional cyclical downturn. Third, long-term supply agreements are being signed faster than expected; although they may cap some near-term ASP upside, they benefit long-term margins, ROE, and earnings stability. Fourth, even after raising its capital expenditure forecasts, UBS still expects the company to generate significant free cash flow from 2026 to 2028 and potentially initiate share buybacks in the second half of 2026.

Analysis framework

The report combines fundamental forecasts, industry supply-demand analysis, earnings forecast revisions, scenario valuation, and a P/B-ROE framework. UBS first analyzes demand and supply for DRAM, NAND, and HBM, then adjusts its ASP, bit growth, capital expenditure, operating profit, and EPS forecasts, and finally derives the 12-month forward target P/BV and price target based on long-term ROE and the cost of equity.

Methodology notes

• Valuation methodsP/BV-ROE valuation framework

  Deriving the target P/BV from long-term ROE and the cost of equity

  UBS values SK Hynix at 3.65x NTM P/BV, based on a long-term ROE forecast of 40.2% and a cost of equity of 11.5%.

• Industry supply and demandMemory semiconductor supply-demand analysis

  Bit demand, ASPs, capacity, and long-term agreements jointly determine the earnings cycle

  The report assesses industry supply-demand tightness and ASP trends through DRAM and NAND bit demand growth, HBM capacity consumption, long-term supply agreements, and incremental wafer capacity.

• Scenario analysisUpside/base/downside scenarios

  Different ASP and operating profit assumptions correspond to different price target ranges

  The report presents an upside scenario of Won3.30m, a base scenario of Won3.00m, and a downside scenario of Won800k, comparing DRAM/NAND ASP growth and operating profit assumptions.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• SK Hynix equity (000660.KS)

  Core covered security

  Strengths

  Leading HBM position, AI-driven DRAM and NAND memory demand, strong free cash flow, potential share buybacks, and valuation-implied ROE below UBS's long-term forecast.

  Weaknesses

  Recent DRAM ASP upside has been below expectations, fixed pricing under some long-term agreements may constrain near-term ASP elasticity, and capital expenditure continues to be revised upward.

  Comparison

  UBS expects SK Hynix to hold the industry's leading HBM bit shipment share at 48% in 2026; it forecasts 39% in 2027, slightly below Samsung's 41%, while Micron is expected to have 20%.

  Risks

  Memory affordability, capital expenditure pressure at hyperscalers, a correction in the memory cycle, slower structural improvement in the NAND industry, and volatility in smartphone and enterprise demand.

Key data

• 12-month ratingBuyThe report reiterates the Buy rating.
• 12-month price targetWon3,000,000Lowered from Won3.20m to Won3.00m.
• Current share priceWon1,401,000Price date is July 29, 2026.
• Potential price upside114.1%Based on the price target and current share price.
• Forecast dividend yield1.6%The report discloses forecast total shareholder return of 115.8%.
• Current valuation1.66x NTM P/BVUBS believes this valuation implies a long-term ROE of approximately 18.8% to 18.9%, below its 40.2% long-term ROE forecast.
• 2027 DRAM bit demand growth forecast36% YoYAbove the 22% forecast for 2026.
• 2027 NAND demand growth forecast23% YoYAbove the 20% forecast for 2026.
• 2026/2027/2028 free cash flow forecastWon188tn / Won320tn / Won374tnUBS still expects strong free cash flow despite raising its capital expenditure forecasts.
• 2027/2028 operating profit forecast revisionsWon505tn / Won544tnLowered by 19% and 18%, respectively, from previous forecasts.
• 2026/2027 capital expenditure forecastWon47tn / Won62tnRaised from previous forecasts of Won45tn and Won60tn, respectively.
• 2026/2027 HBM shipment forecast17.2bn Gb / 23.0bn GbCorresponding to year-on-year growth of 37% and 34%.

Impact & implications

For investment implications, UBS's view is positive: if AI-driven memory demand and tight HBM supply-demand dynamics persist, SK Hynix could maintain earnings power and free cash flow above historical-cycle levels for the next several years, leaving room for valuation recovery. The report also notes that near-term earnings forecasts have been lowered, DRAM ASP upside is partly constrained by long-term agreements, and capital expenditure continues to rise, but these factors are insufficient to overturn the long-term Buy thesis.

Risks

• Rapid increases in memory product prices could weaken customer affordability, particularly against a backdrop of continued increases in hyperscaler capital expenditure.
• Long-term supply agreements could weaken DRAM ASP upside elasticity in the near term.
• DRAM and NAND remain commodity-like products, and a cyclical industry correction remains possible.
• Higher capital expenditure could increase cash flow and supply-demand rebalancing risks.
• SK Hynix's HBM share in 2027 could be slightly below Samsung's, so competitive dynamics require monitoring.
• Changes in smartphone, tablet, server, and enterprise SSD demand will affect DRAM and NAND profitability.

What to watch

• Whether share buybacks are initiated in the second half of 2026 and whether the company updates its broader shareholder-return policy.
• Progress in negotiating long-term HBM agreements and pricing terms for 2027 and beyond.
• Quarter-on-quarter changes in DRAM ASPs, particularly pricing elasticity as the proportion covered by long-term agreements increases.
• Equipment move-in for the Yongin 1 cleanroom and progress on the second cleanroom in 2027, as well as the potential 2029 ramp-up of the M17 NAND production line.
• Whether AI capital expenditure by hyperscalers is constrained by memory cost affordability.
• Changes in 2027 HBM market share among SK Hynix, Samsung, and Micron.