Written by: Rita

SK Hynix's stock price has fallen 52% from the peak on June 22, although it still retains a 115% increase year-to-date. UBS pointed out in its research report on July 29 that there is no basis for the market's downward revision of the valuation of this HBM leader. Currently, the stock price corresponds to a 12-month forward price-to-book ratio of only 1.66 times, implying a long-term ROE of 18.9%. UBS predicts an average ROE of 40.2% from 2027 to 2031. There is a gap of 21 percentage points between the two figures. The market has marked the valuation down to a cyclical low, but the structure of the memory industry has changed. UBS maintains a buy rating, lowering the target price from 3.2 million Korean won to 3 million Korean won.

Valuation implies an ROE of less than 20%, actual ROE exceeds 40%

UBS's valuation framework is based on a price-to-book ratio model that incorporates long-term ROE and cost of equity. The current price-to-book ratio of 1.66 implies a long-term ROE of 18.9%. This level is lower than the average ROE of 17.7% from 2012 to 2022, after the consolidation in the DRAM industry and before the AI boom. However, SK Hynix's profitability has far exceeded that period. UBS forecasts a 40.2% average ROE from 2027 to 2031.

While the stock price has fallen by 52%, the market consensus outlook for operating profits in 2027 has actually been raised. UBS's own forecast is 17% higher than the market consensus. Analysts are also raising earnings forecasts, but the stock price is still declining. This divergence will not last long.

Long-term agreements are accelerating in signing. UBS previously expected the progress to be slow, but ten agreements have already been signed, with more under negotiation. Signing parties include major U.S. hyperscale companies and large OEM manufacturers. LTAs may suppress some ASP upside space in the short term, but are beneficial for margins and returns in the long term. Price negotiations for HBM for 2027 and beyond are also underway.

AI agent drives accelerated memory demand, HBM's leading position solidified

UBS is more optimistic than the market regarding memory demand. The growth rate of DRAM bit demand is expected to rise from 22% in 2026 to 36% in 2027, while NAND is projected to increase from 20% to 23%. AI agents are the main driving force, not only at the HBM level but also extending to traditional server DDR5, LPDDR5, as well as NAND's KV Cache and storage needs.

The supply-side dynamics remain unchanged. Almost all new wafer capacity for DRAM is being used for HBM, and there is no new capacity for NAND outside of China. It is expected that the proportion of DRAM front-end capacity used for HBM will reach 25% by the end of 2026 and 31% by the end of 2027. UBS estimates that HBM capacity will increase from 230,000 wafers per month at the end of 2026 to 270,000 wafers per month at the end of 2027, with HBM shipments rising from 17.2 billion Gb in 2026 to 23 billion Gb in 2027. SK Hynix is expected to maintain a 48% market share in HBM shipments in 2026, dropping to 39% in 2027, slightly below Samsung's 41%, but still one of the major players.

DRAM ASP only rose 30% quarter-over-quarter in the second quarter, lower than previous expectations. UBS provided three reasons: the share of mobile DRAM in revenue rose to 19%, priced lower than other categories; some LTA fixed price terms have come into effect; HBM4 only began large-scale shipments at the end of the quarter. Accordingly, UBS has lowered its operating profit forecast for 3Q26 to 8.6 trillion Korean won, which is still slightly higher than the market consensus.

Buybacks may start by the end of the year, FCF will support large-scale shareholder returns

UBS expects free cash flow for 2026, 2027, and 2028 to be 18.8 trillion, 32 trillion, and 37.4 trillion Korean won, respectively. Despite continued increases in capital expenditure, FCF generation capacity remains strong. Capital expenditure is expected to be 47 trillion Korean won in 2026 (approximately 71% year-over-year growth), 62 trillion Korean won in 2027 (+31%), and 67 trillion Korean won in 2028 (+8%). The first cleanroom at the Yongin factory will have equipment installed in February 2027, with the second in the second half of 2027. The M17 NAND factory may start mass production from 2029.

UBS believes SK Hynix may begin share buybacks in the second half of 2026, with an expected scale of about 12 trillion Korean won. The company may announce a more comprehensive update on its shareholder return policy in the 3Q26 earnings call. UBS's long-term judgment is that SK Hynix will use 50% of its free cash flow for shareholder returns, including a combination of dividends and buybacks.

The DRAM industry has consolidated from 15 companies to 3, significantly enhancing supply discipline. SK Hynix's profit structure has changed, and the logic of cyclical stocks is no longer applicable. The demand increment brought by AI agents is accelerating, and LTAs are locking in the bottom line for long-term margins. The stock price has halved from its peak, and its profitability is several times stronger than at the peak of the last cycle. A price-to-book ratio of 1.66 corresponds to an ROE of 18.9%, while the company can actually earn 40%. The market is using the logic of the old cycle to price assets in the new cycle, and this mismatch will not last long.

Disclaimer

This article is a compilation and interpretation of third-party brokerage research reports (UBS, July 29, 2026) by Chao Xiang Research, combined with publicly available market information. The ratings, target prices, earnings forecasts, and related judgments quoted in the text are the views of the analysts of that brokerage and only represent the position of their respective institution, not the views of Chao Xiang Research, and do not constitute any investment advice.

The market has risks, and decisions must be made independently. This article should not be used as the basis for buying or selling any securities.