SK Hynix to make deep capex cut; virus spread may threaten chip output

SEOUL (Reuters) - South Korea’s SK Hynix, the world’s No.2 memory chip maker, warned a new virus outbreak in China could pose a threat to chip production and said it would sharply reduce annual investment after posting a steep fall in quarterly profit.

The spread of coronavirus, which has killed more than 200 people and infected nearly 10,000 worldwide, threatens to hit the global economy. Manufacturers have suspended production in China and airlines canceled flights, disrupting supply chains.

“We are preparing a contingency plan,” SK Hynix finance chief Cha Jin-seok told an earnings call on Friday.

The virus outbreak has caused no production disruptions at Hynix, which has a chip plant in the eastern Chinese city of Wuxi, but manufacturing could be hit if the situation was prolonged, Cha said.

Until late last year, prospects for the global chip market had been improving, aided by an easing of the U.S.-China trade war, the rollout of 5G mobile networks and higher spending by the data storage sector that helped cut bloated chip stockpiles.

That optimism fueled a chip share rally, with SK Hynix rising 15% over the past three months. Shares in Hynix gained 1.3% on Friday, beating the benchmark’s fall of 0.2%.

SK Hynix’s conservative outlook echoes that of bigger rival Samsung Electronics, which offered a guarded forecast after posting a 34% profit drop.

“The conservative comments from Samsung and Hynix indicate chip supplies would not grow significantly, which should help improve the supply-demand balance,” said Song Myung-sup, an analyst at HI Investment & Securities.

SK Hynix cut capex by 25% last year to 12.7 trillion won and said it would further cut investment this year, citing uncertainties despite robust demand. It did not give a detailed spending plan.

“When the market conditions improve, we could flexibly review investment plans, but we will take a cautious approach considering market uncertainties,” Cha said.

Hynix, which supplies chips to Apple Inc and Huawei, said its December-quarter operating profit slumped 95% to 236 billion won ($202 million), far below a 433 billion won average forecast and marking the lowest profit in seven years.

It also swung to a net loss of 118 billion won from a net profit of 3.4 trillion won, reflecting a decline in investment valuations of Japanese peer Kioxia.

But recovery in chip demand helped lift South Korea’s factory output in December, racking up its fastest jump since November 2016.