SK hynix Inc. (A000660) Earnings Call Transcript & Summary

Good morning and good evening. First of all, thank you all for joining this conference call. And now, we'll begin the Conference of the Fiscal Year 2021 First Quarter Earnings Results by SK hynix. This conference will start with a presentation, followed by a divisional Q&A session. [Operator Instructions] Now, we shall commence the presentation on the fiscal year 2021 fourth quarter earnings results by SK hynix.

[Interpreted] Good morning, and good afternoon, and evening to those calling in from abroad. This is Park Seong Hwan, the Head of IR at SK hynix. Welcome to the SK hynix 2021 Fourth 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 Business Officer; Park Myoung-Soo, in charge of DRAM Marketing; and Park Chan-dong, in charge of NAND Marketing, and the new Head of Finance, [ Kim Juseon ]. 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 will now begin SK hynix earnings release conference call. The CBO, Kevin Noh, will first present the earnings for the fourth quarter and 2021, followed by the company's plan and market outlook.

[Interpreted] Good morning. I wish everyone and your family health and happiness in the New Year. 2021 saw uncertain business environment continue, with global supply chain disruptions, geopolitical risks and a pandemic that remains unabated. Under these challenges, SK hynix actively responded to soaring IT demand in a non-face to face environment, based on industry-leading technology and quality competitiveness. As a result, we recorded KRW 43 trillion in consolidated revenue, surpassing the record year of 2018 and KRW 12.4 trillion in operating profit, an increase of 148% Y-o-Y. DRAM sales were actively increased in PC, graphics and Chinese mobile phones, where non-face to face demand was solid. Based on its quality competitiveness, we were able to maintain our position as market leader among our major server customers. Furthermore, we already secured industry leading quality competitiveness in next generation strategic products, such as DDR5 and HBM3 expected to be met with rapid demand growth, and began successful development and mass production of 1A nanometer technology-based products, using EUV equipment. NAND recorded bit shipment growth of over 60% for the year, achieving the highest ever revenue, and turning around and turning around to profit for the year, thanks to smooth production ramp-up of the 128-layer and outstanding product competitiveness. In the mobile SSD market, by focusing on demand for high-density solution products, we drastically improved our business portfolio with more than 6-fold increase in datacenter SSD sales and doubled in PC SSD in only 2 years. Last December, we completed the first closing of Intel's NAND business acquisition, which will help improve the DRAM dependent business structure, while adding growth momentum to our NAND business. We thus acquired Intel's SSD business and the Dalian fab. The acquired NAND business, which will be incorporated as a subsidiary was launched on December 30th as Solidigm. With this acquisition as a stepping stone, SK Hynix will firmly position itself as a leader in the NAND industry, by leading technological development and meeting customer needs with a broad product portfolio. Furthermore, the company will not only expand the market share, but also continue to evolve into a global memory solution provider, with understanding and extensive know-how in computing architecture. I will now report on the company's financial performance in the fourth quarter 2021. Consolidated sales in the fourth quarter was KRW 12.38 trillion, up 5% Q-o-Q and 55% Y-o-Y, recording the highest quarterly sales ever for the company. DRAM bit shipment grew by mid to high-single digit in line with the guidance. Thanks to strong demand for servers and graphics, as well as for new mobile products and PCs. ASP fell by mid-single digit. In particular, server DRAM sales were the highest since the record boom period of third quarter 2018, driving the overall sales growth. NAND bit shipment growth was in the low teen percent, on par with the guidance, backed by datacenter SSD demand and increasing densities in mobile products. ASP fell by around 10% due to the component supply disruption and soft mobile demand in the Greater China region. Despite the price decline, NAND remains on the fast-paced growth, with sales achieving record highs for 3 consecutive quarters, especially datacenter SSD, reaching the highest ever quarterly and annual revenue. Meanwhile MCP's portion out of revenue fell from 24% to 19%, as both bit shipment and price fell on the heels of slowing mobile demand from the Greater China region. But MCP revenue for the year was also a record high, growing 59% Y-o-Y. The company's fourth quarter operating profit was KRW 4.22 trillion, up 1% Q-o-Q and up 337% Y-o-Y. Operating profit margin was 34%. As for profitability by product for DRAM despite the higher share of 1Z nanometer process and sales of premium products like GDDR6, cost reduction was not able to offset the price decrease due to the initial start-up cost burden, as mass production began in M16. On the other hand, NAND achieved a double-digit cost reduction with sales portion of the 128-layer, reaching 80%. This improved profitability following the previous quarter and helped achieve a profit turnaround for the year. Depreciation and amortization in the fourth quarter was KRW 2.79 trillion, slightly increased from the previous quarter. EBITDA was KRW 7.01 trillion and EBITDA margin, 57%. There was a net non-operating profit of KRW 0.45 trillion. The fair value valuation at year-end generated KRW 0.51 trillion gain from our investment in Kioxia. Net profit before tax was KRW 4.67 trillion, up 1% Q-o-Q. Net profit was KRW 3.32 trillion, with a net profit margin of 27%. Consolidated cash balance end of the year was KRW 8.67 trillion, up by KRW 3.72 trillion from the previous year. Interest-bearing debt was KRW 17.62 trillion, increased by KRW 6.37 trillion Y-o-Y. The company's debt-to-equity ratio and net debt-to-equity ratio at year-end stood at 28% and 14% respectively. Despite the increase in CapEx, free cash flow, which was -- which is cash flow from operating activities less acquisition of plants, property and equipment was KRW 7.31 trillion on the back of improved profitability. As a result, total dividend payout per the company's dividend policy will be KRW 1.06 trillion, higher by 32% from the previous year. Dividend per share was set at KRW 1,540. Next is the company's market outlook and plan. Memory market this year is expected to see supply chain issues continue through the first half, which is one of the most important variables for demand. We expect this to gradually ease, as we move into the second half, improving the overall demand-supply situation. Looking at demand by application, the PC market where shipment has grown more than 10% for 2 years in a row since the pandemic, is expected to see solid demand this year, led by commercial PC, but the said -- shipment is expected to be flat, with growth rate slowing down due to the high base effect. DRAM content per PC is expected to grow at a high-single digit percent, with lower sales of the relatively low content Chromebook and higher sales of laptops and gaming PCs. Demand for client SSD is expected to be driven by the pent-up demand from supply disruptions and increased content in PCIe Gen4, and for the client SSD, it is expected to grow in the low 30%. The smartphone market this year is expected to grow in the mid-single digit level, similar to last year's. However, there will be growing polarization in memory content, owing to the rising costs due to supply disruptions, while high-end models are increasingly adopting 8-gigabyte or higher DRAM and 256 gigabyte or higher NAND and switching to LPDDR5, lower priced models are expected to see slower growth in memory densities. In the server market, investment is expected to continue to increase this year, with the growth in 5G network and MECs. Replacement demand continues for servers from heavy investment in 2017 and '18, especially with the expansion of DDR5 supporting CPU adoption from the second half of the year, we anticipate demand for high-spec servers to increase. Demand recovery is expected to continue, not only for cloud service, but also for corporate server customers, which has been improving since the second half of last year. As a result, this year's demand for server DRAM is expected to grow by high 20% and enterprise SSD by low 30%. The long-term outlook for high performance memory products, including server products and HBM is highly positive, as demand for high-performing IT infrastructure is rising, due to factors such as the acceleration of non-face-to-face infrastructure buildup, dissemination of AI/Machine Learning, and emergence of NFT and Metaverse as new applications. Overall, DRAM demand growth is expected to be in the 18% this year and we are aiming for the company's bit shipment growth to be in line with market growth. However, demand may soften in the first quarter due to seasonality, and we plan to respond more flexibly in light of our lower inventory level. Accordingly, the company's DRAM bit shipment in the first quarter is planned to decrease by mid to high single-digit Q-o-Q. Following last year, the company will maintain profitability oriented DRAM business this year, we plan to adjust our inventory level with flexibility, in response to changes in demand and strive to reduce industry volatility and maximize profitability. NAND demand growth this year is expected to be about 30% and the company is planning for bit shipment growth that outpaces demand growth again for the year. This is based on our existing NAND business, and when Solidigm's volume is included, bit shipment growth is expected to almost double compared to last year. However, given similar seasonality as DRAM in the first quarter, NAND bit shipment is expected to decrease by a high single-digit percent, with the possibility of falling further depending on the market environment, such as supply chain issues. Meanwhile, when including Solidigm, approximately 20% bit shipment growth is planned Q-o-Q. Through Intel NAND business acquisition, we have set the stage to step up from being a late entrant to becoming a number 2 player. We will focus on growing the consolidated NAND business, while maximizing the synergy between our existing NAND business and Solidigm, in order to solidify our position as the industry leader that leads in technology and product development, as well as satisfies global customer needs. Let me now turn to the company's technology and product roadmap, which will be the basis of sustained growth even in an unpredictable market environment. For DRAM, we plan to increase the portion of 1Z nanometer and 1A nanometer. 1A nanometer, where EUV is applied will take up over a quarter of total production by the end of the year. In the case of DDR5, for which demand will be in full swing this year, we began shipping for computing applications in the fourth quarter last year. We also recently shipped samples of 24 gigabit DDR5 based on 1A nanometer, which is the largest density possible on a single DRAM chip. This product improved the cost efficiency of datacenter operations and will be supplied first to cloud datacenters, then are expected to be used in high-performance servers for big data processing or metaverse deployment. The 176 layer NAND, which started mass production in Q4 last year, is based on the same tech platform as the 128 layer. With minimum changes in the process, we plan to continue the success of the success of the 128-layer, which showed industry leading producing ability and performance. With mass production smoothly underway, the 120 layers share out of production is expected to be around 70% by the end of the year. Let me make a correction. Now, regarding the percentage for the NAND, by the end of the year, it is not the 128 layer, but the 176 layer. So it will be the NAND 176 layer, that will reach around 70% share out of total production by the end of the year. Our CapEx in 2021 was KRW 13.4 trillion. This will likely increase this year, mostly due to large investments in construction and infrastructure for future growth, such as purchase of Yongin land site and the R&D center in the U.S. On the other hand, equipment spending is planned to be similar to last year and will remain below the annual depreciation and amortization cost. As equipment lead time keeps getting longer, we are striving to minimize the impact of scheduled equipment deliveries. But given that disruption cannot be completely ruled out, we are looking into a number of options to address the issue. There will be additional CapEx requirement for Solidigm, but the impact will be limited, considering its own cash generation capability. Next, I will report on the company's ESG management activities and performance. Through the CEO-led ESG management committee, the company last year focused on discussing mid to long-term ESG strategies and improving on important and urgent issues. To achieve RE100 by 2050, we set an interim goal of using renewable electricity for 33% of the power in all our workplaces by 2030. To manage the specifics, we have decided to establish the carbon management committee. The committee will oversee the entire process from our GHG reduction plan to implementation and play a central role in addressing climate change and renewable electricity sourcing. The company's MSCI ESG rating was upgraded for the second consecutive year to Grade A. This was achieved by a positive evaluation of our improvement in water stress management, such as reduction in water intensity and target setting for longer-term water reuse through our task force activities. In addition, for 12 years in a row, we are included in the Dow Jones Sustainability Asia Pacific Index, which selects companies based on both financial factors and non-financial factors such as, environmental and Social impact. Through such active ESG management, we will try to differentiate ourselves in sustainability aspects, and reach a balance between qualitative and quantitative growth. Finally, let me introduce our new shareholder return policy, designed to better share the fruits of our future growth. For the past 3 years from 2019 to 2021, we set a dividend policy of KRW1,000 per share as fixed dividend and 5% of the annual FCF as additional dividend, FCF being the cash flow from operating activities, less acquisition of plants, property, and equipment, to ensure predictability in shareholder return, while reflecting earnings volatility caused by the industry cycle. Accordingly, we paid KRW1,000 per share dividend in 2019, when the FCF was in the negative and since then, as FCF improved every year with performance pick-up, dividend rose steadily to KRW1,170 per share in 2020 and KRW1,540 per share in 2021. In light of the dividend performance and business changes since then, a new shareholder policy has been drafted to be applicable for the next 3 business years from 2022 to 2024. First, the policy of paying a fixed dividend per share with the additional dividend of 5% of the annual FCF will be maintained. But the fixed dividend will be raised by 20% from KRW1,000 per share to KRW1,200. KRW1,200 per share is equivalent to the 3-year average dividend per share, which is now used as the minimum dividend payment for the next policy period. In addition, we will pay quarterly dividends starting this year. By paying a fixed dividend of KRW1,200 per share spread evenly each quarter, we hope to provide a more stable shareholder value. We will amend the Articles of Association at the upcoming general shareholder's meeting, so that quarterly dividends can be paid from the first quarter. Finally, we will use the 50% of the cumulative FCS for a 3-year period from 2022 to 2024, as a resource for shareholder return. And also, depending on the circumstances, we might also utilize this fund to conduct share buyback. As we continue to generate and increase free cash flow, we will try to level up the return to our shareholders. SK Hynix will never cease to challenge and develop, so that we can create a new history in our company's value. Thank you.

[Interpreted] And with that, we are ready to take your questions.

[Foreign Language] Now, Q&A session will begin. [Operator Instructions] [Foreign Language] The first question will be provided by Ricky Seo from HSBC.

[Interpreted] Well, first thank you very much for announcing a much more positive and improved shareholder return policy. You did explain a bit about Solidigm, but could you give us a bit more explanation or a more detailed explanation about the expected synergy? And also, we see that between the 2 businesses, you also have technological differences between the FG versus CTF. So what would be the technology roadmap, as well as the business plan for the business?

[Interpreted] Now, with Solidigm becoming a member of the SK hynix family, what we can see first is the increase in the combined market share. So, both from the NAND market share as well as the enterprise solutions. Now for the NAND market share, based on this simple arithmetic, this will bring us to the number 2 position in the market. Of course, there have been some cases where the consolidation between 2 memory companies do not necessarily end up as 1 plus 1 being 2. But then, in our case fortunately, there is few redundancies in our product portfolio and we were able to thus minimize any losses in the course of the consolidation. So we are actually hoping that the -- we would be able to end up with market share that is bigger than the simple sum. And of course there could be some variability or volatility in the beginning, but we will try our best to defend this synergy as much as possible. And then I would say that the biggest advantage that hynix can gain out of this is, in terms of the enterprise field, especially in the SSD area, Solidigm has very good technological understanding and also deep understanding in the computing architecture. So based on this understanding and knowhow, we are now able to come up with our own product roadmap, which I would say is a big benefit to SK hynix, especially given the demerits that we had to experience as a late entrant so far. And yes, also it is true that as you have observed, the 2 businesses had different technologies. So in terms of the NAND for the -- there is the charge trap-based 3D NAND and then there is also the floating GATE technology. And yes, the 2 technologies are different, but then we also -- yes, and we also realized that the FG technology might be a bit difficult to be applied in areas other than the mobile. But then, let's say, especially for SSD, in terms of the product reliability, I would say that the FG would be far superior than the CTF. So -- and also now, other companies are launching the QLC line up these days, but Intel has long been the leader in the QLC, and I would say that now Solidigm has the only technological base that would allow the launch of the PLC line up down the road. So I had also emphasized earlier that the PLC based SSD lineup will be able to reach the kind of cost structure that would allow it to replace the HDD. So we believe that in addition to the cost synergy, we also will be able to have the synergy on our topline. So, of course, on one hand, it is possible that maintaining the 2 technologies in parallel might not be entirely beneficial in terms of the cost implications. But given the potential in the top line synergy effect, we are currently planning to maintain the 2 technologies in parallel. So let me add further to that. Now for the floating gate technology now, it is specialized in -- for SSD, especially for the datacenters and also given that, so as you can see from, it's like 4-bit per cell or 5-bit per cell. Now this is also the type of technology that can have better reliability than CTF, in cases where we have to have more capacity per cell, and that is why SK hynix is planning to maintain this technology as well.

[Foreign Language]

[Foreign Language] The following question will be presented by Sei Peter Lee from Citigroup.

[Interpreted] I have a question about the Intel NAND business as well. So it was reported earlier that you have completed the first phase of the acquisition and thus, you have acquired the Intel's SSD business and the Dalian Fab. Then what are the, then, the changes on the revenue as well as the assets for SK hynix, and also when you combine the earnings, then what are the changes?

[Interpreted] Now, as of 2021, the SSD company, Solidigm, and the Dalian Fab company have been incorporated as subsidiaries and they are immediately reflected on our consolidated balance sheet. And then for the revenue to be gained or the sales to be gained from 2022, they will be booked into our consolidated profit and loss statement. And in terms of the changes to the balance sheet, then there is an addition of KRW 8.6 trillion in inventory assets as well as PPE, and KRW 1.7 trillion in intangible assets and then the cash and cash equivalent is lower by KRW 7.5 trillion and the -- about KRW 2 billion for the second phase of the acquisition, is set aside as debt.

[Foreign Language]

[Foreign Language] The following question will be presented by Sunwoo Kim from Meritz Securities.

[Interpreted] Now, I do understand that the investment for the year is going to be slightly up from last year, and also we see that there is a trend of the unit cost of investment going up in the memory industry overall. And there are also some concerns among investors about this absolute increase in investment. So my question is about the cost curve. So for the -- for both DRAM and NAND, what has been the bit cost for the year, and also the year before that? So, have there been any changes to the bit cost? And also this year, do you expect the bit cost to fall? If yes, then what do you believe will be the reasons?

[Interpreted] So the question is pertaining to the CapEx intensity, and also the concerns related to this coming from the market, which is about the increase in the unit CapEx per bit. Now, of course, so that has been an area of interest and concern for the company as well. Now for both DRAM and NAND, what we have been seeing at least up until the early 2010s is that, thanks to tech migration, there was almost automatic cost reduction that was made possible almost every year. So simply from tech migration, we were able to reduce the cost. But then now in the past few years, that has been made much more difficult. So for DRAM, we see that tech migration does not automatically lead to cost reduction, at least, there are now limitations to that. And also for the NAND technology, the 3D stacking is becoming more and more difficult. So that means that, just through tech migration, it is no longer so easy to reduce the cost or for example, like [indiscernible] or CoO. And as a result, so what we have been doing is to increase CapEx in order to have capacity to ramp up, in order to meet the demand coming from the market, which has resulted in increasing CapEx so far. And between DRAM and NAND, we see that at least for NAND, the cost reduction situation is a little bit better, in terms of the reduction in the CoO because for the 3D stacking, at least it is at the moment, a little -- a bit easier than the tech migration in the DRAM. So that is why I say that for the NAND, the situation is a bit better. But now interestingly enough, when we look at the CoO reduction rate for the past few years, for both hynix and also other players in both DRAM and NAND, when we look at the numbers, then compared to the CoO reduction in 2018-2019, we see that there actually has been a deeper cost reduction in 2019-2021 and possibly even in the 2022 period, based on the estimation, and that is because unlike the 2018, which was a boom year, now at that time, rather than looking for efficiency, we were investing heavily and also producing heavily, to simply meet the rapidly rising demand. But now the situation, is that the market growth is a lot more stable. So it seems as if SK hynix and other players are focusing more on getting more efficiency out of the existing assets. And also given the fact that the tech migration now has limitations in enabling cost reduction, we have been focusing more on reducing inefficiency in fab or the existing business structure, and that is how we were able to maintain the CoO reduction rate, that is similar to the -- to what we have seen in early 2010s.

[Foreign Language]

[Foreign Language] The following question will be presented by Jong Jin Park from JPMorgan.

[Interpreted] I have 2 questions. Now, yes, so between the FG and the CT technology, so the technology for the NAND is different between the 2 companies and then now let's say, will it be possible to use Intel's controller IC on the NAND that has been produced by SK hynix' CT, so that is the first question? And the second question is about the EUV. So it was reported earlier, that the EUV based 1A nanometer will pick up about 25% by the end of the year. Now, I understand that for hynix, the EUV is applied on only one layer of the 1A nanometer, and does this still bring about a significant cost reduction or does it increase production. So basically the question is, what would be the advantages of the 1A nanometers, when applied with EUV?

[Interpreted] Now for the NAND business and also the SSD business that utilizes the NAND, now, I would say that there are largely 3 chunks in this business. That would be first, the raw NAND and then the SoC, which would be the controller and the firmware. Now Solidigm, so obviously the Solidigm's SoC or the firmware can be used with the SK hynix produced NAND, I would say that, that is actually at the heart of our synergy -- our expected synergy effect. Now Solidigm has always had business competitiveness. But then Intel, not being a memory focused company, it also had limited capabilities to expand its raw NAND capacity, and that is why its business expansion have been limited. But now, by utilizing FG on the SK hynix' CTF based wafer and also combined with the superior technology of SoC and firmware by Solidigm, we do believe that we will be able to further expand into the market. Now having said that, utilizing the FG-based SoC or firmware on the CTF based wafer, could take some time, because of the necessary technological revision. But then fortunately, the 2 companies have worked very closely together, and now we are able to utilize Solidigm's SoC and firmware on the company's 128 layer NAND wafer and the prototype has been produced based on this, and we hope to launch this into the market soon. And to your second question, now for the EUV, basically, our position is that, there has to be a cost breakeven between the EUV and the DUV, which is the ArF, and so for the -- now when we look -- when we compare the technology between the EUV and the DUV, then for the same patterning for the DUV, it requires multiple shots, whereas for the EUV, it requires only one shot. So of course there are obvious technological advantages to the EUV, and it could also improve the yield. But there are also some disadvantages with the EUV, meaning that particularly, the technology not being mature enough in the beginning, there could be some additional costs in the beginning. But again, when it comes to the patterning for the company, the position is, is that as we adopt different technology, there has to be a cost breakeven between the EUV and DUV.

[Interpreted] We will take the next question.

[Foreign Language] The following question will be presented by Simon Woo from Bank of America Securities.

[Interpreted] I also have 2 questions. And actually first, thank you very much for the very detailed IR information and materials. So now my first -- my 2 questions. First is about the financials, and second is about the fab operation. First question about financials is, it was mentioned in the presentation that the company plans to utilize 50% of the free cash flow for the next 3 years for shareholder return. And then for the remaining resource, it could be used for share -- share buyback or other forms of shareholder return. Then it means that the calculation or the settlement period for this would be in 2024. So this -- so may I understand that this is not going to happen next year, or the year after that? And then a follow-up question is for the Dalian Fab. So as a result of acquiring the Dalian Fab, the company now has an increase of KRW 1.7 trillion in intangible asset. Then what is going to be the number of years for amortizing this, or does the company plan to amortize this as cost in the second quarter and start out with a clean slate? And then the second question is about the fab operation. And so, you still have -- the company still has the Yongin land and there is also demand for more plant space. So I wonder when the groundbreaking is going to take place for the Yongin site? And for the M16, now to keep using the remaining space in the M16 for the next 4 to 5 years, I'm not sure whether that is going to suffice because, yes, it is a big plant, but when we look at the clean room space, it simply does not appear to be enough to meet the demand for the next 4 to 5 years. So what is the company's plan for the fab operation?

[Interpreted] Now, first about the dividend, as it was explained earlier that we explained earlier, we intend to use about 50% level of the cumulative 3-year free cash flow to return to shareholders. And as I mentioned earlier, the policy is to have KRW1,200 per share as fixed dividend to be added with 5% of the free cash flow of the year, and this is to be paid out evenly on a quarterly basis. Now for SK hynix and other memory players, usually the first quarter and the second quarters are when the CapEx is concentrated. So it's unlikely to have free cash flow in the first and the second quarters. So for the first and the second quarters, the dividend payout is likely to be the fixed dividend divided by 4, in other words KRW300 per share. But then in the third quarter and the fourth quarter, it's likely that free cash flow is going to be generated. And in such a case then, the 5% of the free cash flow for the year is likely to be calculated and paid out in the fourth quarter of the year. And then now for the cumulative 3-year free cash flow and also the 50% of that, now that means, yes, in order to do the calculation then, it has to be after 2022, 2023 and 2024, meaning that the calculation or the settlement will be done in the early 2025. So it could happen that way or in another scenario, let's say, like in 2018, if there is a huge free cash flow generated in a particular year, then we might decide to have a special dividend payout. Just so that we can avoid having to payout a huge sum at the end of the period. So in other words, just to even out the financial burden. For the second question on the intangible assets of KRW 1.7 trillion acquired through Solidigm, we are currently not considering amortization. If I may add a bit more explanation, in some other M&A cases what we have seen is that the transaction value was significantly higher than the book value. So the intangible asset portion is, was quite large. But in the case of Solidigm, that does not apply and for --and because of that for the intangible assets, unless there is damages to the business, currently, we do not have any plan for impairment. And about the -- so on the question, about the fab space, and so the question was specifically about the Yongin timeframe, then also the available space for DRAM in M16 fab. And actually it's a big question for the company as well. And, yes, it's true that there is a need for us to secure the site in Yongin and start with the fab construction. And we believe that we need to have a new fab go into operation by the early 2026. But then it doesn't entirely depend on us. It depends more on the SPC, which is a completely separate entity from SK hynix, but it depends on the SPC, which is currently buying the site and also preparing the ground to create an industrial complex there. So once the SPC is done with that, then we need to get the -- we need to buy the site from them and then we can go into the groundbreaking for the fab. So there are some uncertainties involved here. And it is true that because of the faster than expected ramp up in the M16, there is a need for additional space and should there be some, let's say unexpected delay or issues with the planned Yongin fab or the Yongin site, then we would have to look for other space, and the company's is currently mulling over the different options regarding that as well.

[Foreign Language]

[Foreign Language] The following question will be presented by Hyunwoo Doh from NH Investment Securities.

[Interpreted] Now, I have questions about the inventory first. Now we see that the one thing that was a bit interesting in the market last year, was the gap in the inventory between the suppliers and the customers. And so since the third quarter until today, do you -- does the company see this gap having been reduced or having been increased? And another question is about the demand coming from the market, and we see recently that the demand is higher than expected, and that is probably because the customers are concerned about the COVID 19 or the omicron variant, have been trying to build up their inventory and perhaps they have been, let's say pulled up the demand that might be necessary after the second quarter into the first quarter. So those -- then does this also mean that perhaps after the second quarter, demand might start to drop, very quickly?

[Interpreted] Now, I will take your question to be pertinent about the DRAM. So that is also my -- that is also going to be our response. Now between the third quarter and today, and there appears to be a gap in the inventory position between the suppliers and the customers was the question. Now for the suppliers, so for the company, our inventory level remains largely unchanged, so it is between 1.5 weeks to 2 weeks and it did dip a little bit at the end of the year. And as was explained earlier for the fourth quarter, we would be trying to respond mostly to the real demand and there is also the need for us to rebuild the inventory that went down a little bit in the fourth quarter of last year. So we are also trying to rebuild the inventory, in preparation for the second quarter and the second half. So by the end of the first quarter, it's likely that the inventory level will be a bit higher. And in relation to demand, what we have to focus on most is the computing side, and looking at the PC industry. So we see that at the end of last year, the PC industry's memory inventory went down a little bit and also for the server side, there have been earnings releases and also outlook announcements by major players recently, and all of them are commonly looking ahead to increased investment in 2022. And in terms of the inventory buildup by the customers by the -- at the end of the year, we see that as a natural inventory buildup. So we see not much -- so we don't really see anything out of ordinary on the mobile side either, and for the computing side, we believe that the balance between PC and server is continuing. And to the second question, briefly, now for the supply chain disruption, it works on both ends, meaning on both demand and supply. So it also affects supply. So in the end, it actually balances out. And then in for the second half, what we have to focus on is, of course, the inventory on both the demand and supply side, but also the inventory for the new products and the old products. Now, for companies like us, will have to achieve bit growth based on 1A nanometer, then the inventory consumption for all tech products will happen very quickly going from the first half to the second half of the year. But then now for the new tech, in this case it is, I mean, there is not going to be much inventory on both the demand and supply side, because they are new products. So we would also have to look into the inventory position on different aspects, as we try to respond to the changes.

[Foreign Language]

[Foreign Language] The following question will be presented by Nicolas Gaudois from UBS.

Both would be related to DRAM. The first one is regarding DDR5. What is your forecast for DDR5 demand as percentage of total DRAM demand in H2 '22 and for the first half of 2023? Do you expect supply mostly [ 1A ] nanometer to be able to keep up with demand? Or could you actually see the premium of DDR5 over DDR4 remaining high for longer as supply does not match demand for a while? And then as a follow-up question and more longer-term, you talked about scaling in DRAM becoming more and more challenging. What is your view on when you could actually move to 3D DRAM, or more specifically 4F square vertical channel access transistors for mass production? And would you still have to be -- need more advanced lithography like [ INA ] EUV to continue scaling? [Foreign Language]

[Interpreted] First about the DDR5 and the question was about the percentage or the share of the demand for DDR5 out of the total DRAM demand. As of the end of 2022, the forecast is somewhere between high teen percent to low 20%, and this is out of the server side. And then by the end of 2023, we expect there to be a crossover. So for your question, which was till the first half of 2023, then we believe that by the end of the first half of '23, the expectation is that it will be along that trend line, until the crossover at the end of '23. And now for -- currently, the demand for DDR5 is rising, especially from the high-end or a high-value PC side. And for the server now, DDR5 offers the advantages of better performance with low energy consumption and also better reliability, as this is on-die SoC. So we believe that there is going to be growing demand for 1A nano-based 500 Mbps, 600 Mbps into '23. And in terms of the premium for the DDR5, I cannot give you the specific numbers, but it's true that there would be some cost addition or premium added, compared to the DDR4, because even if it is the same lithography, then still the net die would be reduced, and also there would be some other process, technologies to be added, and also new BOM costs would be increased, and also, we need to have additional ECC DIMM. And also for the high density modules, we would also have to add GFC process. So overall, there is going to be increased costs for the DDR5, but then as I said earlier, it is rising among the high end or the high value. So on the client side, we see that there is demand coming from the high-value segment, and likewise for the server. So, especially for the customers, for the high density products, we are working on the right value proposition, so that we will be able to reach a balance between demand and supply. The next question was about the 3D DRAM, which is actually the question that we have been getting recently from the market. And based on the experience of the NAND, which has moved on from 2D NAND to 3D NAND, so I believe that the expectation in the market is that, it is going to be natural for DRAM to move from 2D-to-3D. But then compared to NAND, which is actually technologically relatively simple. For DRAM to move to 3D, is by no means easy. But for DRAM, as I said earlier, because there are going to be a number of technological limitations to come our way in the next few years, that means that the memory suppliers would have to try to -- wouldn't have to try to overcome the technological limitations with increased cost. So for 3D DRAM, it's not like, it's a set course or a set path for us, and the question is only about when. It's more about addressing the various technological limitations that we are going to experience over DRAM, and among the various options of addressing technological limitations, moving to 3D DRAM could be one of them. So I would say I could put the question into this frame. And of course, there could be many different technologies to be used, in order to address the scaling limitation of DRAM. And part of the technological solution could be, to have structural change to -- on the technological platform, in other words, moving onto 3D DRAM. So I would say that, that is the question given to hynix as well as other DRAM companies and I'm sure that the other DRAM players are also mulling over this question. And in terms of when this is going to happen, I must say that there is not enough visibility for us to give you a specific timeline. But then, the likely scenario is that, it could happen sometime in the late 2020s. So I'm sure that including hynix, many different DRAM companies currently are looking over the possibility of various component technologies.

[Interpreted] And that concludes the SK hynix 2021 fourth quarter earnings release conference call. Thank you very much. [Portions of this transcript that are marked [interpreted] were spoken by an interpreter present on the live call.]