Revenues and operating profit miss by 5%, but still achieve record-breaking growth

Operating profit growth of 557% wasn't enough to arrest the decline in SK Hynix shares that have now taken on the dimensions of a crash

SK Hynix second-quarter results showed record-beating growth, but still fell short of analyst expectations, prompting another share price plunge of almost 10%. At one stage in Seoul on Wednesday, the stock was down 19% before recovering sharply in the last hour of trading.

SK Hynix (KR:000660) is now trading more than 50% below its all-time high set as recently as June.

Although SK Hynix delivered its highest-ever quarterly operating profit of KRW 60.5 trillion ($42.5 billion) with a 557% year over year increase, it came up short of the aggressive KRW 64 trillion consensus. Revenues of KRW 79 trillion and net profit of KRW 93.9 trillion were also the best recorded.

However, sentiment in the Korean market, and towards semiconductor stocks in general, is so sour at present that traders were in no mood to appreciate the achievements. Both the benchmark index and its largest components SK Hynix and Samsung (KR:005930) remain in freefall. The Kospi KR:180721 index has now lost 41% of its market capitalization in 28 trading sessions.

The 5% slippage versus consensus on revenues and operating profit by SK Hynix is inexcusable, Mike O'Rourke, chief market strategist at Jones Trading, told clients in a note. To disappoint investors just a few weeks after its $29 billion listing of depositary receipts on Nasdaq demonstrated poor "communication and messaging," he wrote.

Even before Wednesday's miss, semiconductor stocks were nosediving after the prospect of fierce competition from China's recently-listed CXMT (CN:688825) alarmed investors. Reports this week that Chinese companies had developed deep ultraviolet lithography machines that manufacture chips also raised concerns about a slowdown in the AI capex that has driven the rapid growth of Korea's memory chip makers.

If the Chinese are capable of producing cheap dynamic random access memory chips at scale, analysts worry the semiconductor supercycle may prove short-lived.

Not everyone shares this concern, however. Futurum's head of research, Rolf Bulk downplayed these fears, predicting to CNBC that "CXMT is still 2 to 3 generations behind SK Hynix, Samsung and Micron $(MU)$ when it comes to the performance of their chips."

High bandwidth memory (HBM) contracts tend to be negotiated on a yearly basis rather than quarterly like dynamic random-access memory $(DRAM)$ and so some analysts believe the "miss" was owing to previously negotiated HBM contracts diluting the average selling price growth.

The precipitous decline in Sk Hynix has been matched by semiconductor stocks elsewhere. Samsung dropped 5%, while Japan's Kioxia Holdings (JP:285A) followed Tuesday's 15% plunge with another 13% Wednesday. Semiconductor stocks SOX in the U.S have also suffered from the same concerns about China's competitive threat.

Crashes like the one experienced by Korea often illustrate where leverage is most pronounced. This month alone 360,000 retail accounts in Korea have been wiped out and the market has recorded 1.2million margin calls as Korea's army of retail investor 'ants' suffered heavy losses. On Wednesday, regulators were obliged to enforce the circuit breaker, suspending all trading temporarily, for the second consecutive day and the tenth time this year.

Of particular concern to the Korea Securities Commission is the extensive use of leveraged exchange-traded funds to gain exposure to the market. Steps taken to limit their availability come into effect on Friday July 31.

In pre-market trading Wednesday, SK Hynix ADRs (SKHY) were indicating a drop of just 0.55% to $129.40

-Jules Rimmer