Fitch Ratings has revised the Outlook on SK hynix Inc.'s Long-Term Foreign-Currency Issuer Default Rating (IDR) to Positive from Stable and affirmed the rating at 'BBB'.

The ratings on its senior unsecured notes have also been affirmed at 'BBB'.

The Outlook revision reflects Fitch's expectation that SK hynix will continue to strengthen its financial profile over the next 12-18 months. The company has a robust market position as the world's second-largest producer of DRAM and NAND memory semiconductors, continues to improve on profitability and has a prudent financial policy focused on deleveraging and balance sheet enhancement.

SK hynix's recent actions, including disciplined capital expenditure and positive free cash flow generation, support a faster-than-expected reduction in net debt. Although we expect strong performances in 2025 and 2026, there is still uncertainty about demand, the impact of US trade policy, competitive position versus Samsung Electronics Co., Ltd. ( AA-/Stable), investment and the potential for medium-term overcapacity. An upgrade will be dependent on greater certainty on these issues.

Key Rating Drivers

Strong Balance Sheet Provides Buffer: SK hynix's improved balance sheet is a substantial buffer against downside risk and enhances its capacity to invest to sustain technology leadership. We forecast the EBITDA leverage ratio to fall to 0.3x in 2025 from 0.7x in 2024, due to robust operating cash generation and debt reduction. The deleveraging reflects the SK hynix's strong market position in premium DRAM products, including high-bandwidth memory (HBM) and double data rate 5 chips for servers, amid high AI spending.

Financial resilience is set to strengthen further, allowing SK hynix to better absorb future downturns in the memory semiconductor sector. We forecast EBITDA margins of 40%-50% and expect the cash flow from operations (CFO)-capex/debt ratio to remain high over the next 12-18 months.

Stronger Competitive Position in HBM: SK hynix's competitive edge in HBM is a critical driver of its improved performance and prospects. Its leadership in advanced DRAM, particularly HBM, is supported by strong technological capabilities and product innovation. SK hynix is the major provider of HBM3E chips to NVIDIA, which dominates graphic processing units for AI servers. HBM's share of SK hynix's DRAM revenue is estimated at around 30%-40% in 2024 and we expect it to rise further through 2025, supporting more stable revenue and reducing cash-flow volatility.

Revenue Visibility Improving: Growing demand for advanced applications - including AI, 5G and high-performance computing - is lifting revenue visibility in the memory chip market. The rising adoption of HBM, which is often contracted under one-year agreements with fixed volumes and prices, reduces cash-flow volatility and enhances predictability. SK hynix is well positioned to benefit from this trend thanks to its technological leadership and first-mover advantage in HBM.

Strengthening Market Position: SK hynix's credit quality is supported by its strong position as the world's second-largest maker of memory chips and its leadership in the fast-growing HBM segment. SK hynix's share in the DRAM segment has been expanding in the last two years. In 1Q25, the company was the largest global DRAM supplier by revenue with a 37% market share, according to OMDIA, a research institution. SK hynix's NAND memory business has also improved significantly to a number two position after it acquired Solidigm's SSD-focused business from Intel Corporation in December 2021.

Industry Cyclicality Remains a Constraint: Despite the current upturn driven by AI and data-centre demand, the memory semiconductor industry's inherent cyclicality continues to constrain SK hynix's rating. The conventional memory industry largely remains vulnerable to cyclical swings, geopolitical tensions, and fluctuating consumer electronics demand. US initiatives to attract semiconductor investment may also introduce structural inefficiencies, contributing to volatility.

Lingering Geopolitical Risks, Tariff Concerns: SK hynix faces ongoing geopolitical risks, including incremental tactical responses from US or Chinese regulators, given that 30%-40% of its DRAM and around 30%-40% of its NAND are manufactured in China, and 24% of revenue is derived from the country in 2024. While US government measures restrict China's access to advanced technology, limiting competitive threats from Chinese memory makers in the near-to-medium term, these risks remain relevant to the rating.

Peer Analysis

SK hynix's credit profile is now stronger than that of Micron Technology Inc. (BBB/Stable), supported by larger scale and market share in both DRAM and NAND segments. SK hynix maintains a technological edge in high-density products and is likely to report stronger financial metrics, with 2025 EBITDA leverage forecast at 0.3x versus Micron's 0.8x, reflecting management's focus on improving its capital structure.

Compared to Microchip Technology Inc. (BBB/Stable), SK hynix benefits from greater scale and now higher profitability (EBITDA margin over 40%), while Microchip continues to show lower demand and price volatility. Recent excess supply and high inventories have pressured Microchip's revenues, but it remains a top global microcontroller producer. SK hynix's leverage is now generally stronger, warranting a modest rating differential.

Relative to NXP Semiconductors N.V. (BBB+/Stable) and Renesas Electronics Corporation (BBB/Negative), SK hynix stands out for its leadership in HBM and exposure to growing AI and data centre demand, supporting higher profitability and lower leverage. In contrast, NXP and Renesas benefit from more stable EBITDA margins and higher free cash flow, thanks to their fab-light models and lower capex requirements, but both have smaller scale and less pronounced growth prospects. Renesas, in particular, faces challenges from slow sector recovery and rising competition, with elevated leverage expected to persist.

Key Assumptions

Fitch's Key Assumptions within Our Rating Case for the Issuer

Revenue to increase by around 30% in 2025, driven by a higher average selling prices (ASPs) on robust AI-driven demand and double-digit bit growth for DRAM, offsetting weak NAND revenue

Operating profit to reach over KRW30 trillion in 2025.

Capex to increase to around KRW26 trillion in 2025. This will be invested in equipment purchases and expansion of its fabs in Yongin and Cheonju, Korea. Capex intensity to hover around 30%-35% over the medium term.

Shareholder distribution at about KRW1,500 per share, in line with the company's policy.

R&D spending at a high-single digit percentage of revenue.

No major M&A in the medium term.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:

EBITDA leverage below 1.5x and CFO-capex/total debt in excess of 20% on average through the cycle;

Improvements in market share in the DRAM and NAND market

FCF margins in the mid- to high-single digits through the cycle.

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Outlook to Stable:

Positive sensitivities are not met

Liquidity and Debt Structure

SK hynix has cash, cash equivalents and short-term investments of KRW16.9 trillion compared with short-term obligations of KRW8.5 trillion at end-June 2025, including USD1.7 billion (KRW2.4 trillion) in exchangeable bonds. The exchangeable bonds will not affect the company's liquidity, as they involve only conversion to equity. We believe SK hynix's liquidity remains adequate on our expectation of positive FCF from 2025, which will support medium-term liquidity. The company has solid access to capital markets and local banks.

Issuer Profile

SK hynix, based in South Korea, is the second-largest memory semiconductor company in the world. It designs, manufactures and sells memory chips such as DRAM and NAND flash. SK Square owns a 20.07% stake in the company.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS

Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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