Written by: Rita
SK Hynix's stock has declined 52% from its June 22 high, yet it still holds a 115% gain for the year. In a research report on July 29, UBS stated that the market's downward revision of valuation for this HBM leader is unjustified. The current stock price implies a 12-month forward price-to-book ratio of only 1.66x, reflecting an implied long-term ROE of 18.9%. However, UBS forecasts an average ROE of 40.2% from 2027 to 2031—a difference of 21 percentage points. The market has priced the stock at cyclical lows, but the structural landscape of the memory industry has changed. UBS maintains a Buy rating, lowering its target price from KRW 3.2 million to KRW 3 million.
The implied ROE from valuation is below 20%, while the actual ROE exceeds 40%.
UBS's valuation framework is based on a price-to-book model using long-term ROE and cost of equity. The current price-to-book ratio of 1.66 implies a long-term ROE of 18.9%, which is below the average ROE of 17.7% during the period from 2012 to 2022, prior to DRAM industry consolidation and the AI boom. However, SK Hynix's profitability has far exceeded that period. UBS forecasts an average ROE of 40.2% from 2027 to 2031.
While the stock price fell 52%, market consensus expectations for 2027 operating profit were revised upward. UBS’s own forecast is 17% higher than the market consensus. Analysts continue to raise earnings forecasts, yet the stock price is declining. This divergence won’t last long.
Long-term agreements are accelerating in signing. UBS previously anticipated slower progress, but 10 agreements have already been signed, with more under negotiation. Signatories include ultra-large-scale manufacturers and major OEMs in the U.S. While LTAs may temporarily constrain some ASP upside, they are beneficial for long-term profitability and returns. Price negotiations for HBM for 2027 and beyond are also underway.
AI agent-driven memory demand accelerates, solidifying HBM's leading position
UBS is more optimistic than the market regarding memory demand. DRAM bit demand growth is expected to rise from 22% in 2026 to 36% in 2027, while NAND demand growth is projected to increase from 20% to 23%. AI agents are the primary driver, extending beyond HBM to include DDR5, LPDDR5 in traditional servers, as well as NAND requirements for KV cache and storage.
The imbalance on the supply side has not changed. Almost all new DRAM wafer capacity is being allocated to HBM, and no new NAND capacity has been added outside of China. Within DRAM front-end capacity, the share allocated to HBM is expected to 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 by the end of 2027, with HBM shipments rising from 17.2 billion Gb in 2026 to 23.0 billion Gb in 2027. SK Hynix is expected to maintain a 48% shipment share in the HBM industry in 2026, declining slightly to 39% in 2027—just below Samsung’s 41%—but still remaining one of the key players.
DRAM ASP rose only 30% quarter-over-quarter in Q2, below prior expectations. UBS cited three reasons: mobile DRAM’s share of revenue increased to 19%, with pricing lower than other categories; fixed-price terms under certain LTAs took effect; and HBM4 only began large-scale shipments at the end of the quarter. Based on this, UBS lowered its Q3 2026 operating profit forecast to KRW 8.6 trillion, still slightly above market consensus.
Buybacks may begin by year-end, with FCF supporting significant shareholder returns.
UBS expects free cash flow of KRW 188 trillion, KRW 320 trillion, and KRW 374 trillion for 2026, 2027, and 2028, respectively. Despite continued increases in capital expenditures, FCF generation remains strong. Capital expenditures are projected at KRW 47 trillion in 2026 (approximately a 71% year-over-year increase), KRW 62 trillion in 2027 (+31%), and KRW 67 trillion in 2028 (+8%). The first cleanroom at the Yongin facility is scheduled for equipment installation in February 2027, with the second to follow in the second half of 2027. Mass production at the M17 NAND facility may begin as early as 2029.
UBS believes SK Hynix may initiate a share buyback in the second half of 2026, with an estimated size of approximately KRW 1.2 trillion. The company may announce a more comprehensive update to its shareholder return policy during its Q3 2026 earnings call. UBS’s long-standing view is that SK Hynix will allocate 50% of its free cash flow to shareholder returns, combining dividends and buybacks.
The DRAM industry has consolidated from 15 manufacturers down to three, significantly improving supply discipline. SK Hynix’s profit structure has changed—cyclical stock logic no longer applies. Demand growth driven by AI agents is accelerating, and LTAs are locking in a floor for long-term profitability. The stock price has halved from its peak, yet the company’s profitability is several times stronger than during the previous cycle peak. A price-to-book ratio of 1.66 corresponds to an ROE of 18.9%, while the company actually generates returns of 40%. The market is pricing this new-cycle asset using outdated cycle logic—this mispricing won’t last long.
Disclaimer
This article is a compilation and interpretation by Chaoxiang Research of a third-party brokerage research report (UBS, July 29, 2026), combined with publicly available market information. The ratings, price targets, earnings forecasts, and related judgments cited herein reflect the views of the brokerage’s analysts and represent the position of their respective institution only; they do not reflect the views of Chaoxiang Research nor constitute any investment advice.
The market carries risks; make decisions independently. This article should not be used as a basis for buying or selling any securities.