SK hynix: When the Chips Are Up

SK hynix can trace its roots back to 1983 when the government pushed Korean companies, including the giant chaebol, Hyundai, into strategic industries like electronics and semiconductors.

It seems striking in retrospect but this hi-tech firm was born to a mother company whose strength was in cars and construction. It had a tumultuous ride through the late 1990s and 2000s before reaching its current position as the crown jewel of the SK Group. Industry policy doesn’t always work so well!

We’ve owned SK hynix in the Platinum Asia Fund for two extended periods since 2013 when the chip market consolidated into three main players controlling 90% of the DRAM market.¹

Chipmaking requires extraordinary technology but it’s cyclical, so the industry structure is crucial.

In the 2010s the company rode the first round of hyperscaler capex spending.² They also profited from the smartphone boom, as the big manufacturers sold more phones, with more memory in each phone. In 2016, Apple, Samsung and others sold nearly 1.5 billion devices.³

In 2019, SK’s revenues fell by a third and profits dropped almost 90% as the cycle turned against them. Their shares dropped sharply as the market lost confidence in the chip oligopoly. We thought the market was wrong. The industry behaved well, so the cyclical downturn was less severe than in the days of the more fractured chip market.

We’ve held our current position since 2020 and Platinum investors have been rewarded. As we write, the company’s share price is up 600% over the past year. Over the past five years the company has returned nearly 60% a year.⁴

What’s really boosted long-term returns is SK’s decision to focus on HBM – High Bandwidth Memory – which requires an incredibly complex manufacturing process to deliver the massive bandwidth chips required for AI.

We’ve owned SK for years but are now trimming steadily. The company is printing money and the outlook is bright. But we’re conscious there’s still a cyclical element to these booms, so we are – pardon the pun – taking some chips off the table.