SK hynix (OTC:HXSCF) Q3 2022 Results Conference Call October 25, 2022 8:00 PM ET
Company Participants
Park Seong Hwan – Head of Investor Relations
Kevin Noh – Chief Marketing Officer
Kim Woo-Hyun – Chief Finance Officer
Park Myoung-Soo – Head of DRAM Marketing
Park Chan-dong – Head of NAND Marketing
Noh-Jung Kwak – Head of Manufacturing Technology
Conference Call Participants
Doh Hyunwoo – NH Investment Securities
Lee Sei Cheol – Citigroup
S. K. Kim – Daiwa Capital Markets
Nicolas Gaudois – UBS
J.J. Park – JPMorgan
Hyun Kim – Meritz
Park Seong Hwan
Good morning, and good afternoon and evening to those calling in from abroad. This is Park Seong Hwan, the Head of IR, SK hynix. Welcome to the SK hynix 2022 Third Quarter Earnings Release Conference Call.
Before starting the conference call, allow me to introduce the executives present here with me today. First, Kevin Noh, Chief Marketing Officer; Kim Woo-Hyun, Chief Finance Officer; Park Myoung-Soo, Head of DRAM Marketing; and Park Chan-dong, Head of NAND Marketing. Let me issue a disclaimer that all outlooks presented by the Company are subject to change depending on the macroeconomic and market circumstances.
With that, we’ll now begin SK hynix earnings release conference call. Kevin will first present the earnings for the third quarter of 2022, followed by the Company’s plan and market outlook. There will then be a Q&A session with the executives.
Noh-Jung Kwak
Good morning. Allow me to first report to you the Company’s performance in the third quarter of 2022. The third quarter saw deteriorating macroeconomic conditions due to high inflation and interest rate hikes. This led to a rapid decline in customers’ memory demand, and the Company’s bit shipments of both DRAM and NAND fell quarter-on-quarter.
Prices also fell at a faster pace than expected, resulting in third quarter revenue of KRW10.98 trillion, down 20% quarter-on-quarter despite the strong dollar. Third quarters generally see a pickup in market conditions with favorable seasonality. But this year, the market environment remains weak with almost unprecedentedly soft demand. While demand for consumer products such as PCs and smartphones is weakening further, procurement demand from servers also softened as customers try to work down their inventories. The Company tried to maximize its sales by expanding sales to mobile customers who introduce new models and to hyperscale customers who had relatively deeper pocket, but DRAM bit shipment fell by a mid-single-digit percent, lower than previous guidance, and ASP fell by around 20% quarter-on-quarter.
For NAND flash, the Company aim to offset the weakness in consumer product demand by expanding sales of eSSD, but the bit shipment fell short of the guidance, falling by low teen percent quarter-on-quarter, including Solidigm sales volume and by high single-digit percent when excluding Solidigm.
ASP also fell by more than 20%, both for SK hynix alone and for the integrated entity. As for profitability by product, the 1A nanometer DRAM and 176-layer NAND products showed a smooth ramp-up during the quarter, reaching stable yield rates and expanding the sales share of these leading-edge products, which in turn led to unit cost reductions for both the DRAM and NAND. However, such cost reductions were insufficient to offset the fast decline in prices.
Operating profit in Q3 was KRW1.66 trillion, down 61% from the previous quarter. Operating profit margin was 15%, falling from 30% of the previous quarter. Depreciation and amortization in Q3 was KRW3.57 trillion, increased by KRW0.81 trillion quarter-on-quarter. EBITDA in Q3 was KRW5.22 trillion, and EBITDA margin, 48%.
There was nonoperating profit of KRW27.7 billion. This includes net interest expense of KRW121.3 billion and a net foreign currency related gain of KRW132.7 billion that was driven by the transaction gain on accounts receivables and translation gain on Kioxia investments despite a translation loss on foreign currency-denominated debt due to the strong dollar. Pretax income was KRW1.68 trillion with corporate tax expense of KRW0.58 trillion. Net profit was KRW1.1 trillion with a net profit margin of 10%. Consolidated cash balance at the end of Q3 was KRW7.21 trillion, down by KRW0.28 trillion from the previous quarter.
Interest-bearing debt was KRW22.02 trillion, increasing by KRW2.64 trillion compared to a quarter ago. Debt-to-equity ratio and net debt-to-equity ratio at the end of Q3 was 32% and 22%, respectively, rising from the previous quarter.
Next is the Company’s market outlook and plans. Contrary to expectations earlier in the year, the memory market in the second half continues to struggle with demand contracting sharply. Rising interest rates in major countries in response to inflation, in combination with the strong dollar, are heightening concerns of a recession, weighing down on both consumption and investment. Demand deceleration is being felt more severely in IT products due to the base effect of strong growth during the pandemic. As such, demand growth for DRAM and NAND for the year are expected to drop to unprecedentedly low levels being low to mid-single-digit percent and around single-digit percent, respectively.
Given the current environment, the Company’s bit shipments for DRAM and NAND in Q4 are expected to be similar to that of Q3. PC shipment growth, which had recorded high growth in the past two years is now expected to be down by mid-teen percent with correction likely to continue into next year. Smartphone unit shipment is also expected to fall by a high single-digit percent due to lengthening replacement cycles and the impact of COVID-19 lockdown. But given the economy sensitive nature of consumer goods, demand for low- to mid-end products are falling steeply, while demand for high-end and flagship models launched in the second half remains relatively solid. Thus, increase in memory content per phone is offsetting the slowdown in smartphone unit shipments.
For servers, demand remains relatively healthy compared to other applications this year, but demand in the second half is being affected by investment reduction by corporate and inventory correction by the customers due to macroeconomic uncertainties. Nevertheless, growth in cloud services, such as AI and big data analytics as well as investment by big tech companies, are projected to continue and thus, servers will continue to drive overall memory demand.
Although the ongoing uncertainties are making predictions increasingly difficult, the demands of DRAM and NAND are estimated to grow by low teen percent and mid-20%, respectively, next year. Meanwhile, new applications such as AR and VR devices and content increases from price elasticity are possible upside factors for memory demand.
Against the sharp demand decrease, memory suppliers have begun taking actions such as cutting back on CapEx and adjusting utilization rates. However, as there is a time lag for the impact to materialize, the current supply-demand imbalance is expected to persist for the time being. In light of such market environment, the Company is aggressively cutting back on next year’s capital spending to align supply with demand.
This year’s CapEx is likely to close at around high KRW10 trillion, which is higher than that of last year, while next year’s CapEx will be reduced by more than 50% compared to that of this year. The rate of reduction is as aggressive as what the industry had back in 2008 and ’09 during the global financial crisis.
Given the high levels of inventory expected throughout the industry at the end of the year, the Company will minimize investment for wafer capacity and even look into delaying certain investments for tech migration. In order to effectively respond to the rapidly changing demand environment, the Company is also planning to reduce production of relatively low margin products.
Moreover, we are reconsidering our product mix and equipment allocation, which may sacrifice some of the wafer capacity in the near term but will improve efficiency of our fab operations in the long term. Though the Company’s DRAM and NAND wafer production next year will be reduced compared to this year and the pace of migration to the leading-edge technology nodes will also be slower than what was originally planned.
Yet, we will maintain investments that are critical to mass production of new products, like DDR5, LPDDR5 and HBM3, which will be the drivers of the future demand growth so that we remain fully ready to support our customers’ demand.
Next, let me explain the Company’s technology road map. For the 1A-nanometer DRAM and 176-layer NAND, both yield improvement and ramp-up are continuing smoothly. By the end of Q3, the 1A-nanometer accounted for around 20% of total DRAM production and the 176-layer, 60% of total NAND. In particular, the share of the 176-layer has gone up considerably in all applications, contributing to improvement in cost competitiveness. The Company also completed the development of the 238-layer NAND in August this year.
With the significantly improved NAND and SSD competitiveness, the Company aims to close the gap with the market leader while seeking to respond to the upcoming market downturn by focusing on creating business synergy and collaboration with Solidigm.
The DDR5 market is finally expected to grow in 2023 in terms of the ecosystem and market demand. This has been held back by the delay in a CPU launch, but that gave time for the ecosystem to prepare and for demand to be built up. The recent market situation has lowered the price burden as well, which is likely to stimulate faster transition to DDR5 by server customers. The Company will secure leadership in DDR5 market based on its full lineup of leading-edge 1A-nanometer products, including high-density products like 3DS.
Regarding the recent U.S. government’s restriction on semiconductor equipment export to China. The Company has received a one-year waiver for licensing requirements to move equipment into China. The Company will work closely with relevant stakeholders, including governments, customers and partners in different countries to prepare against external uncertainties and to ensure business continuity.
Throughout this year, a multitude of factors have magnified uncertainties, and the memory industry is now facing a market downturn we have never seen before. But at the same time, the Company today is not what it was in the past. And we will live up to our role as a global semiconductor leader by striving to maintain stability in the ecosystem.
Last is the Company’s ESG management activities. In July, the Company published its sustainability report 2022 and announced the ESG strategy framework, PRISM. PRISM is a new and more developed initiative that includes all social value 2030 goals the Company announced last year, while also incorporating new requests by relevant stakeholders.
PRISM consists of five pillars: Pursue, Restore, Innovate, Synchronize and Motivate. It explains the reason and purpose behind the Company’s pursuit of ESG management as well as the detailed goal.
The first pillar, Pursue, relays the ultimate purpose of ESG management. The Company practices ESG management to create economic value as well as social value and thus, create a happier world and a brighter future for all. To that end, the Company will try to protect the earth by restoring the environment, create a better environment by developing innovative and future-oriented technologies, which are captured in the second and third pillars, Restore and Innovate.
Achieving all of this requires cooperation from not only the Company’s employees, but all like-minded partners. That is why the fourth and fifth pillars of PRISM, Motivate and Synchronize, set goals to muster collective efforts of internal members and external stakeholders.
Under these five areas, the Company disclosed around 20 quantifiable goals to be achieved by 2030. In addition, the Company also published a separate TCFD report for the first time this quarter. It contains an analysis of the risks and opportunities related to climate change as well as an estimation of potential financial impact on the Company.
The Company will provide regular updates to our progress towards these goals and will transparently disclose the process of our unique ESG management efforts based on PRISM. By doing so, the Company will try to exert a positive influence and help create a brighter future. Thank you.
With that, we’re now ready to take your questions.
Question-and-Answer Session
Operator
Now Q&A session will begin. [Operator Instructions] The first question will be provided by Doh Hyunwoo from NH Investment Securities.
Doh Hyunwoo
I have two. They are about the inventory, investment reduction as well as production cut. Now first, about the investment cutback. So the presentation did explain a bit about the plan, but can the Company elaborate a bit further about the details? For example, what is going to be the extent of the investment cutback?
And also, what is going to be the portion between the, let’s say, infrastructure versus equipment and also between new investment versus investment into tech migration?
And second question is pertaining to production cut. So again, the question is what is going to be the share between DRAM and NAND? And also, is the production cut going to be in the form of reduction in the wafer input? Or is it going to be suspension of some equipment utilization?
Unidentified Company Representative
Now please understand, first off, that it is not going to be easy for me to give you the details about the proportion of production cuts or investment cutback by different categories and for all of our investments.
Now having said that, now in terms of the total CapEx, so compared to this year, including the investment year-to-date as well as the remaining investment until the end of the year, so compared to the investment for the year, we expect the CapEx to go down by around 50% next year.
So that is the business plan that we are currently preparing. In other words, CapEx reduction by slightly over 50%. We are also considering some scenarios where the CapEx reduction could be higher than that. But for now, the plan is to be slightly over by 50%.
And in terms of the investment reduction between infrastructure versus equipment, I would say that they are going to be roughly proportional. So it’s not going to be like investment is going to be maintained in infrastructure while it is cut back in equipment. So that is not the case. So it is going to be proportional.
And likewise, for DRAM and NAND, although the investment cutback on NAND is going to be slightly higher than on DRAM, again, they are going to be roughly proportional. And then for the production cut, now given that the demand is slowing down in the industry overall, now what we are going to do is try to reduce the production on low-margin products.
So these are the products where the demand, to begin with, is not very strong, but we would produce them first and then look for demand later. And as a result, they tend to be low margin. So we would be reducing the production of these products first. And we are currently reconsidering the wafer input. So we would be reducing the input into the fabs as a way as the approach toward production cut.
And another approach that we are considering and already implementing is something that we were not able to do during the upturn. In other words, in order to enhance the efficiency in a fab, we could reallocate the equipment inside one fab or reallocate the product mix between the fabs. So in the long run, it would serve to enhance the efficiency of our fab operations, while for the short term, it would also have the effect of reducing production.
Operator
The following question will be presented by Lee Sei Cheol from Citigroup.
Lee Sei Cheol
Now my question is pertaining to the U.S. restrictions against the semiconductor equipment in China. So this was also mentioned briefly during the presentation, but the Company also has some fabs in China. So I wonder whether the U.S.’ restrictions against the equipment going into China would have an impact on the Company’s fab operation strategy. And does the Company now plan to expand its investment in other geographies, including the U.S.?
Unidentified Company Representative
Now as we all know, there are geopolitical issues that are also affecting businesses’ decision-making process these days. And yes, there is also the restrictions against the equipment being brought into China. So for a company that has operations in China, I would say that these restrictions can also be painful.
But as also was explained earlier, the U.S. government did a grant one-year waiver on licensing requirements for the Company’s China fab operations. So not just for the Company but also for other players, too, that have operations in China. And so this one-year waiver, we believe that it also applies not only to — so it also applies to the development that is currently underway in the fab. So we believe that this would also be applicable to — at least to some of the investment for the development that is currently underway at the fab.
And also for the one-year waiver, we are expecting and hoping that, at least, there would be a one-year extension thereafter. But again, this is not certain given the high level of geopolitical uncertainties these days. So this means that what we used to take as common sense in business, for example, to produce out of the most efficient and cheapest region then to supply globally. So this used to be the business common sense. And now on top of this, we have other layers of factors that we have to consider, which is magnifying the uncertainties from the business perspective as well.
Now having said that, I do believe that it would be essential for us to diversify our production basis down the road for the mid- to long term. But the short term, for us to change production basis at this time will not be easy, as you can imagine.
Operator
The following question will be presented by S. K. Kim from Daiwa Capital Markets.
S. K. Kim
I have questions about the demand. Currently, there are ongoing concerns about the demand deceleration. And in terms of the server demand, for example, the demand for DDR5 and HBM3, so what is the Company’s outlook for the demand on the server side?
And also for next year, new applications are expected to be launched, for example, the XR device. So how does the Company foresee these new applications to affect the memory demand? So does the Company expect these new applications to be the driver of new demand growth?
Unidentified Company Representative
Well, in response to your questions, I would like to provide my answer in three ways. So one is with regards to DDR5 demand. So server demand plus the overall demand, and then the HBM3 demand, followed by the new applications, which could potentially be growth drivers.
Now first, about the DDR5. So out of the server demand, we expect this to take up over 20% share by next year. And by the end of next year, it is expected to reach over 30%. And likewise, for PC, it would be — it would — its share would be around 30%, and it is bound to go higher as the year gets closer to the end. And in addition to that, for the DDR5, based on our strength in performance as well as our finished product portfolio and customer qualification process, the Company plans to increase the sales of DDR5 that would outperform the market trend.
And for the HBM, out of all segments, HBM market grew the fastest this year at a pace of 50% Y-o-Y, and we expect the pace of growth next year to be even faster. But the HBM segment was also affected by the macro condition in the global economy. So the sheer size is not as big as we had expected. But we believe that the HBM segment will continue to grow, and especially for the Company, based on our performance, quality and the collaboration satisfaction from the customers and the SoC partners, the Company will maintain overwhelming leadership in this segment.
In addition to DDR5 and HBM, the Company also has an advantage in LPDDR5. So we have performance advantage, and we also have our collaboration advantage with the high-end segment phone makers as well as SoC partners. So based on these advantages that we enjoy, we will continue to expand the HBM segment for the Company. And we believe that we will be able to — the product will be able to help stabilize demand. And for new applications like XR and VR devices and also in the automotive segment, we believe that the devices are going to have the potential to increase bit shipment in addition to the PC and smartphones.
So for the XR and VR devices, although these set shipments currently is not too big, they will be increasing by about 30% next year. So the set shipment of these devices is expected to grow by 30% next year. And for the medium to longer term, this trend is expected to continue.
And also for the automotive segment, for example, the attachment on ADAS. Now in this case, we believe that the attachment rate is going to double in five years’ time compared to what it is today. And in terms of the memory content, so when we look at the 10-year time horizon, then we believe that there is going to be an increase in memory content by high multiples compared to what it is this year. So by around 5x multiple.
And also, when we look at the other related industries, so in addition to the in-car memory, there is also the network and edge computing and also hosting. So when we look at the other sectors as well, then it is highly likely that the growth is going to continue.
Operator
The following question will be presented by Nicolas Gaudois from UBS.
Nicolas Gaudois
Yes. Just coming back to how you will manage your operations in China going forward. Beyond the U.S. restrictions, there is also currently the lack of availability of EUV lithography tools into China due to how the Dutch government is applying Wassenaar Arrangement, and it’s arguably unlikely to change. So that places a time line in terms of what you’ll be able to do in terms of tech migration in the Wuxi fab, as you eventually would move otherwise to one- and five-nanometer.
With that in mind, can we be confident that you have the flexibility in strategic options, including the possibility of moving back tools to Korea, if needed, over time?
And secondly, you have seen, obviously, downside in DRAM and NAND flash shipments to customers, as did your peers, in the course of Q3. Do you believe that we’re now at the stage where destocking at the customer’s level is sufficient for bit growth to stabilize in the near term, and you just guided for bit growth to be flat Q-over-Q in Q4? And if so, would you assess when looking at combined upstream and downstream inventories that we may have passed a peak level already of combined inventories?
Unidentified Company Representative
Now regarding the first question. Now the Wassenaar agreement, as far as I understand, now this is based on unanimous decisions or consensus; meaning, that it is — it has the kind of a structure where imposing regulations would not be easy. So I do believe that the current situation comes down to issues between certain countries.
Now for the EUV and in the Wuxi fab, now it is a very cautious forecast, but it appears, at this time, that it is unlikely that the EUV will be able to be entered into our DRAM fab in Wuxi. But again, I’m being very cautious here. So given that situation, then lagging the EUV equipment, then in terms of the DRAM tech expansion, now we could still go ahead with it with some of the EUV layers being backed up in Korea. So if this is a scenario, then I do believe that, at least until into the late 2020s, there will not be any critical issues in operating our DRAM fab in Wuxi, although there would be some increase in cost and perhaps a bit of complexity.
But now, let’s say, currently, there are new restrictions in place with one-year waivers. And right now, we are hoping for a yearly extension. But assuming that the waiver is not granted anymore, meaning, that if it comes to a situation where we have to receive tool-by-tool licenses, then as you would know, by the nature of the semiconductor equipment, this would create a very difficult situation for us to bring in the equipment. So if that does transpire, then the difficulty in not being able to bring in EUV into the Wuxi DRAM fab would probably occur earlier than the late 2020s.
So to wrap up my response to this question. Now if the issue is that we are no longer able to operate the fab in Wuxi, then this actually is not in the realm of strategic flexibility. I believe that, that would fall under contingency plan. So let’s say, if the time comes when it appears, it is difficult to maintain operations of the fab in Wuxi, then we might have to sell off the fab or equipment or bring in the equipment to Korea. So we are looking into various scenarios.
But again, this would amount to contingency. So this would be tantamount to an extreme situation. So we are currently hoping that we will be able to maintain our fab operations without such contingency.
Unidentified Company Representative
And to your second question about the inventory. Now at the — so for the inventory at the industry, so both on the supplier side and the customer side, the inventory level is higher than average, and we expect the high inventory to remain into the first quarter of next year, especially given the seasonality in the first quarter. So we believe that it will peak around the first quarter of next year. But the customers are currently trying to work down their inventory first. And also from the supply side, the suppliers have also reduced their production ramp-up capacity.
So we believe that after reaching the peak, then the inventory level across the industry will start to come down.
Operator
The following question will be presented by J.J. Park from JPMorgan.
J.J. Park
Now the prices for both DRAM and NAND are expected to keep declining in the second half of the year. But now when we look at the past trend, then along with the price decline, there is also price elastic growth in content. So what does the Company foresee in terms of the content growth per application next year?
And also looking at the bit shipment in the third quarter and the guidance for the fourth quarter, it appears as if there is going to be DRAM and NAND inventory carry forward next year. Then the Company’s guidance for next year’s bit shipment is much higher. Then what would be the guidance for production growth next year? So I would expect that the production growth will fall below the level of the bit shipment growth, but what is the Company’s expectation?
Unidentified Company Representative
Now first about the content growth projection. It was also mentioned in the presentation that, yes, with declining prices, there is some expectation of content growth down the road. But then when we look at the past 10-year history of memory prices, then the memory price decline has also slowed down.
So to give you more details, compared to DRAM, the price elasticity is higher for NAND, which has stronger consumer orientedness. Having said that, these days, consumers’ purchasing power is also down. So it is unlikely to expect any short-term sharp rebound in content growth.
And by application for PC and smartphones, we expect the DRAM demand to grow by about a low 10% level. And for NAND, by mid- to high-teen percent. And for server, where demand remains relatively solid, the DRAM will be about a 10% level, so mid-10%. And for NAND, it will be over 30%.
But again, looking at history, looking at the past memory downturns, then we do see that the content growth has triggered a transition to high-density memory. So for 2023, there is going to be an increase in PCs — enterprise PCs. So there is some increase in the sales of enterprise PCs, which have higher memory content. And also for the mobile devices, now there is growing demand for larger screen and also transition to next-generation form factor, which are also increasing demand for higher specifications and higher density.
So yes, the Company is trying to create demand from the customers by offering higher content products. And this will also serve as a promotion point for the customers’ products. And this will also be an element of stronger competitiveness for the customers’ products.
Unidentified Company Representative
Now as someone who is in the memory industry, for me to be negative about production bit growth is quite awkward and even painful because the business model in the memory industry is that we would try to cut costs by increasing bit growth in both production and sales, and then the saved cost would then be transferred to the customers in the form of lower ASP.
But now I mentioned already that the capacity investment in wafer will be minimized. So the production bit growth is going to be minimal. And then also, there is also the tech migration bit growth. But — so usually, where we gained bit growth is from the wafer investment and investment into tech migration. But I mentioned already that there is not going to be increase in production.
So the wafer capacity will be reduced, meaning, that the production would also be reduced.
Then the bit growth, the remaining source of bit growth would be investment into tech migration. But for the — as you would know, the tech — the bit growth coming from tech migration investment in DRAM is smaller than NAND. So for the DRAM next year, we are looking into various investment scenarios, but we are also reviewing the possibility of perhaps reducing bit growth for next year’s production.
Operator
The last question will be presented by Hyun Kim from Meritz.
Hyun Kim
I have some questions about NAND. Now we see that the demand deceleration is much faster in NAND compared to DRAM. And also, when we look at the profitability in the industry, then NAND profitability is lower than DRAM. And now the Company recently increased its NAND exposure through Solidigm, and it appears as if it has struggled quite a bit in the third quarter. So when we look at the numbers, at the bit growth, excluding Solidigm, then it is higher.
So what was the profitability in the third quarter?
And also in the fourth quarter, it is expected that there will be inventory valuation loss and also some provisioning. So what is the Company’s expectation or guidance for the future profitability of NAND?
And another question about NAND is about the development. So in the presentation, it was mentioned that the development for NAND is on schedule, and that the Company has completed the development of 238-layer. But as we all know, development has various meanings, and also completion could mean different things. So could you be more specific about your development of 238-layer being complete?
And when does the Company believe that there — you can go through the customer qualification and start selling to customers? And what is the expected cost reduction to come from the 238-layer?
Noh-Jung Kwak
Now the second question will be answered by Mr. Park Chan-dong, who is the Head of the NAND Marketing, and this is Kevin now responding to the first question regarding Solidigm. Now please understand that given that Solidigm is a nonlisted company, it is difficult for me to give you specific numbers about their performance in the third quarter. But excluding the one-off cost, we were expecting Solidigm to record profit in non-GAAP terms and about KRW200 million deficit or KRW200 million loss in GAAP terms. So that was the expectation in the early part of the year.
But as you know, the market situation has considerably worsened than what was expected in the early part of the year. So as a result, the Solidigm’s performance was also lesser than what we had expected. And also, at the same time, Solidigm used to be a — one division in Intel, but now it has become a stand-alone company. So it is still undergoing the process of standing up on its own. So as it was going through this transition, it was, I would say, hard-pressed to deal with many of the challenges that were arising rapidly from the market.
Now — but when we look at the overall competition landscape in the NAND market, then it is also true that we do need some adjustment or corrections. And also for SK hynix, we have already gone over the critical mass in terms of the market share. So yes, although it is struggling at this time, I do believe that once we complete the consolidation in the next one to two years, then the strategic benefits out of this will far outweigh the challenges or the issues.
Park Chan-Dong
Next is about the NAND development. Now when we were first introducing the 3D NAND, then at the time, because of our, let’s say, lesser competitiveness at the time, we also had some gaps in terms of the cost and the technology. But then starting with the 128-layer, we were able to catch up very quickly in terms of the mass production as well as the cost. And coming into the 176-layer, we were able to stabilize the cost as well as mass production.
So we smoothly went on to mass production for 176-layer. And by the end of the third quarter, it will be — it will reach 60% of — it reached 60% of all NAND production. And with the — so we completed the development of the 238-layer. So we completed the development as we have notified through the SMS two months ago. And the customer sample will start to be provided in the early part of 2023.
And given the Company’s know-how in being the first player to apply the double stack and PUC in the industry, we foresee no complications in the development and mass production of the 238-layer. Our plan is to start mass producing 238-layer by the middle of 2023.
Operator
The last question will be presented by Ricky Seo from HSBC.
Ricky Seo
Now I have two questions. First is that now we see that the demand deceleration is much worse than expected. And likewise, the reaction by the memory companies is getting more and more aggressive. Now looking at the current picture, then of course, we did talk about inventory earlier, but looking at the overall picture and especially looking at the cycle, then in what part of the cycle does the Company believe that we are in now? And in other words, when does the Company believe that the market situation will begin to recover?
And the second question is about the valuation — inventory valuation loss. Now given the sharp decline in memory prices, I presume that there would have been recognition of inventory valuation loss. So can the Company share the size of the valuation loss, if possible?
Unidentified Company Representative
I take it as a larger question about where we are as an industry and where is the memory industry headed in the future. Now looking at the memory cycle now, then obviously, yes, it is highly cyclical. And of course, the memory industry itself has gone through many upturns and downturns.
Looking at where we are standing today at this time in 2022, I would say that the current downturn is quite serious for everyone involved in an unprecedented manner because they — it is mostly caused by the macroeconomic uncertainties and geopolitical issues. And we need to take a look between DRAM and NAND.
And for the customers, when there is a downturn, then there is a certain benefit to be gained for them in the form of lower prices. But looking at the downturn today, then, of course, obviously, it is painful for the suppliers. But also for the customers, they are no longer in the position to just enjoy this downturn and lower prices because they are saddled with a high level of inventory. And obviously, there would also be some inventory valuation loss, which is also related to the second question. And — but now looking at DRAM, the number of suppliers is limited and also the customers are going through a hard time as well.
So given the market dynamics here, I do believe that there would be perhaps a stronger force or a stronger power to try to restore the market.
But looking at NAND, it is a bit different. I mean, on one hand, the geopolitical issues are more complicated, and there are many more suppliers, and there’s also the price elasticity to consider. So it is much more difficult to predict when the NAND market is going to recover.
So that means the timing of when the macroeconomic uncertainties and geopolitical issues ease would be when the memory market or the memory industry can also look forward to an upturn. Of course, there is going to be some time lag between the two events, but we would have to wait and see whether the macroeconomic conditions and if geopolitical issues ease in any way.
So given this picture, then hopefully, the market would start to stabilize in the second half of next year. So that is our expectation and hope. But again, due to the macroeconomic and geopolitical uncertainties, we cannot rule out the possibility that the current downturn may be — may last a bit longer than that.
And for the memory supplier to cut back on production and capacity is indeed quite painful because, like I said, what we do is try to gain production and sales bit growth and then achieve cost reduction, then return this to the industry in the form of a lower price. That, I believe, would ensure a healthy and wholesome development of the industry. But bit growth is going to be limited next year and even perhaps none from the DRAM side. So this is by no means a healthy picture that we want.
And — but again, for DRAM, there will be a strong enough force for restoration sometime next year. So we hope that we will be able to go back to normal, healthy industry in the near future. And likewise for NAND, it would move, I believe, in the same track as DRAM, although it might take longer.
Kim Woo-Hyun
This is the CFO speaking. And with regards to your question about inventory valuation loss. So in the past quarter, it was around KRW200 billion.
Operator
Thank you very much. So that concludes the SK hynix earnings release conference call for the third quarter 2022. Thank you very much for your participation.
Be the first to comment