Is SK Hynix's Plunge Unreasonable? UBS Bullish on AI Upgrade Cycle and Long-Term Contracts, Target Price at 3 Million KRW

UBS has released a research report stating that SK Hynix (KR000660) (SKHY-US) shares have declined 52% from their June 22 peak, yet remain up 115% year-to-date. The firm believes the recent sharp correction is 'unreasonable,' noting that the current share price corresponds to an estimated price-to-book ratio (PBR) of just 1.66x, below the level justified by the company's long-term profitability.

UBS highlights that both market and its own 2027 operating profit forecasts for SK Hynix have been raised by 361% and 281% respectively, signaling a significant shift in the memory semiconductor landscape.

The bank expects artificial intelligence (AI) development to continue driving memory demand, projecting that agent AI will accelerate DRAM bit demand growth from 22% in 2026 to 36% in 2027, while NAND bit demand growth will rise from 20% to 23%.

UBS notes that SK Hynix is progressing faster than expected with its Long-Term Agreements (LTAs), having already signed 10 contracts, with more under negotiation. Clients reportedly include U.S. hyperscale cloud service providers and major OEM manufacturers.

While LTAs may limit short-term average selling price (ASP) upside, UBS believes they will enhance long-term profitability and returns. Additionally, negotiations for HBM supply beyond 2027 are already underway.

Regarding recent operations, UBS explains that SK Hynix's Q2 DRAM ASP increased only 30% quarter-on-quarter, due to mobile DRAM's revenue share rising to 19%, fixed-price terms in some large contracts, and HBM4 starting volume production only at the end of the quarter.

As a result, UBS has raised its capital expenditure forecasts for SK Hynix: from 45 to 47 trillion KRW in 2026, 60 to 62 trillion KRW in 2027, and 63 to 67 trillion KRW in 2028.

UBS has also lowered its Q3 operating profit forecast to 86 trillion KRW, still slightly above market expectations, based on assumed higher LTA coverage and adjusted DRAM price assumptions.

The bank revised down its 2027 and 2028 operating profit forecasts by 19% and 18% to 505 trillion and 544 trillion KRW respectively, but expects free cash flow of 188 trillion, 320 trillion, and 374 trillion KRW from 2026 to 2028.

Finally, UBS lowered its target price for SK Hynix from 3.2 million to 3 million KRW but maintains a 'Buy' rating, citing sustained memory demand growth driven by AI and the company's fundamentally strong long-term earnings power.