Hynix warns of smartphone slowdown

January 28, 2014 1:21 pm

Hynix warns of smartphone slowdown

By Simon Mundy in Seoul

SK Hynix, the world’s second-largest producer of memory chips by sales, warned on Tuesday that it would be hit this year by slowing growth in smartphones, even as it announced record sales and earnings in 2013.

Hynix’s warning is the latest indication that the heady days of superfast growth for the smartphone industry are coming to an end. “This year, demand growth for mobile prods in general is expected to slow down . . . Growth in high-end smartphones is decelerating,” said Kim Joon-ho, Hynix’s head of business strategy.

Memory chip prices rebounded strongly last year after several weaker producers were eliminated from the sector and the remaining competitors held back from capacity expansion.

This helped Hynix to record a 39 per cent increase in sales to Won14.2tn, with net income beating analysts’ forecasts at Won2.9tn, from a loss of Won159bn in 2012.

The record results came despite a major fire in September at Hynix’s factory in Wuxi, China – one of three production sites for the company – which prompted a quarter-on-quarter revenue decline of 18 per cent in the last three months of the year.

The fire pushed up memory prices, serving as a “blessing in disguise” for Hynix, said Daniel Kim, an analyst at Macquarie.

Hynix’s Mr Kim told analysts that output at the plant had already returned to normal levels, and that insurance payouts meant the repair process had not imposed significant costs.

But he predicted “limited” growth in the average D-Ram memory content of mobile devices – reflecting the fact that smartphone growth is now concentrated in cheaper, low-end phones that require less memory.

D-Ram, which allows smartphones, servers and PCs to run multiple processes simultaneously, accounts for about three quarters of Hynix’s revenues. Nand flash – used on smartphones to store applications and data – generates the remainder.

Demand for mobile D-Ram chips will increase by about 50 per cent this year, predicted CW Chung, an analyst at Nomura, noting that this compared poorly with a rise of nearly 100 per cent last year. Smartphone producers had started restricting the memory capacity of their devices in response to rising prices, he said, while the capacity of high-end phones was already enough to satisfy most consumers.

Nonetheless, Hynix is benefiting from a structural change in the memory market, with supply now dominated by a handful of producers. Samsung Electronics, Hynix and Micron of the US account for about 95 per cent of D-Ram sales, according to Mark Newman of Bernstein Research, while the entire Nand market is controlled by the same three companies, and a joint venture between Toshiba and SanDisk.

Analysts expect all companies in the sector to continue their restrained approach to capital expenditure this year in order to keep prices high.

Hynix’s Mr Kim said the company’s capital expenditure would rise “slightly” from last year’s figure of Won3.6tn, but this will be spent mostly on upgrading lines to produce smaller chips, instead of increasing the volume of wafers processed. Other companies in the sector would also take a conservative approach to investment, he predicted.

Hynix shares closed 4.4 per cent higher at Won 36,800.