BREAKINGVIEWS-Kioxia surge offers SK Hynix a face-saving exit

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Robyn Mak

HONG KONG, Jan 30 (Reuters Breakingviews) - Seven years may not seem like an age to chipmakers, but it is for investors. That's how long South Korea's $440 billion SK Hynix 000660.KS has held on to its holdings in struggling rival Kioxia 285A.T, with few obvious benefits, until recently. Now the Bain-backed Japanese firm's stock has risen 10-fold in a year on hopes that data centres will use more of its memory storage chips. SK's best move now is to cash out while the market is still hot.

In 2018, SK splashed out 395 billion yen ($2.6 billion) on the flash-memory specialist formerly known as Toshiba Memory as part of an $18 billion buyout led by the U.S. private equity firm. Roughly two-thirds of SK's investment went into a Bain-owned entity, which currently controls the rebranded Kioxia, while 129 billion yen went into bonds that can be converted into a 14.35% stake.

But the market for so-called NAND flash memory, a type of storage used in smartphones and PCs that keeps data permanently saved even without power, entered a downturn shortly after, dashing any hopes of a quick and easy exit. A supply glut in 2023 further weighed on the industry's valuations, resulting in SK recognising a 1.7 trillion won, or $1.2 billion, loss on its Kioxia investments that year.

It's a far cry from Kioxia's position today, with the stock up more than a whopping 1,000% since its late-2024 Tokyo debut thanks to rising demand from data centres for NAND-based storage called solid-state drives. Part of that is justified: average NAND prices in the three months to March are forecast to rise by more than a fifth from the previous quarter, according to analysts at Bernstein. Kioxia's revenue is expected to surge 77% year-on-year in the same quarter, per Visible Alpha forecasts.

With SK's convertible bonds alone worth just under $10 billion today, Kioxia has turned into a financial success. Yet there's not much else the South Korean group can do. Increasing its exposure would invite regulatory scrutiny: SK and Kioxia have roughly one-third of the NAND market combined as of last year, according to TrendForce. Besides, SK, which already dominates in another type of memory vital to AI processors, looks well positioned in solid-state drives for data centres, after completing its acquisition of Intel's flash memory business just last year.

With fears of a bubble forming in AI and memory chip stocks, it's the perfect time for SK to engineer a smart way out of Kioxia.

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CONTEXT NEWS

Memory-chip maker SK Hynix on January 28 reported record quarterly operating profit of 19.2 trillion won ($13.4 billion) in the three months to end of December, an increase of 137% from a year earlier.

(Editing by Antony Currie; Production by Aditya Srivastav)

((For previous columns by the author, Reuters customers can click on MAK/ robyn.mak@thomsonreuters.com))