SK hynix Inc. (OTC:HXSCF) Q1 2022 Results Conference Call April 27, 2022 9:00 AM ET
Company Participants
Seong Hwan Park – Head, IR
Kevin Noh – President and CMO
Kim Wook Yoon – CFO
Park Myoung-Soo – In charge, DRAM Marketing
Park Chan-Dong – In charge, NAND Marketing
Conference Call Participants
Kim Sung Kyu – Daiwa Capital Markets
J.J. Park – JP Morgan
Nicolas Gaudois – UBS
Ricky Seo – HSBC
Simon Woo – Bank of America Securities
Peter Lee – Citigroup
Min Seong Hwang – Samsung Securities
Operator
Thank you for joining us today. We’ll now begin the SK hynix 2022 First Quarter Earnings Release Conference Call. This conference call will be comprised of a presentation by SK hynix, followed by a Q&A session. [Operator Instructions] The Company presentation will be simultaneously translated, and the Q&A session will be consecutively translated.
With that, we are now ready to begin.
Seong Hwan Park
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 2022 First Quarter Earnings Release Conference Call.
Before starting the conference call, allow me to introduce the executives present here with me today. First, Kevin Noh, President and CMO; Kim Wook Yoon, CFO; Park Myoung-Soo, in charge of DRAM Marketing; and Park Chan-Dong in charge of NAND Marketing.
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’ll now begin SK hynix’s earnings release conference call. Kevin will first present the earnings for the first quarter of 2022, followed by the company’s plan and market outlook. There will be then a Q&A session with the executives.
Kevin Noh
Good morning. I am Kevin Noh. Allow me to first report to you the company’s performance in the first quarter of 2022. Uncertainties increased in the first quarter with rising interest rates to address inflation, deepening geopolitical risks such as the Ukrainian war and lockdowns in some parts of China, prolonging supply chain disruptions. In particular, rising prices and slowing economic growth have affected consumer confidence with the consequences being felt in demand for consumer IT products like PCs and smartphones.
The company has reflected such business environment and seasonality into our operations as we flexibly responded to demand changes and remain focused on securing profitability. Consolidated revenue in the first quarter was KRW 12.16 trillion, down by 2% quarter-on-quarter but up 43% year-on-year. DRAM bit shipment was down high single-digit percent, in line with the guidance. ASP fared better than market expectations and fell only by low to mid-single-digit percent, backed by solid demand for enterprise PC and servers despite slowing mobile demand. NAND bit shipment growth recorded high teen percent quarter-on-quarter, slightly falling short of the company’s guidance due to seasonality and slowdown in mobile demand in the Greater China region.
Excluding Solidigm, the company’s bit shipment fell by around mid-teen percent. ASP rose by low single-digit percent from the previous quarter, reflecting Solidigm’s performance, which is price premium, thanks to its higher portion of SSD. ASP excluding Solidigm fell by low-single-digit percent from the previous quarter but still fared better than market expectations. The memory price drop in the fourth quarter of last year and the first quarter of this year was much milder than what market expected, which we believe is evidence that the memory market is growing with significantly less volatility as cyclicality. Operating profit in the first quarter was KRW 2.86 trillion, down by 32% from the previous quarter but up 116% year-on-year.
Operating margin was 24%. The fall in operating profit is mainly owed to revenue decrease from the previous quarter but also partly owed to one-off costs such as increase in quality control costs. The company received customers’ reports of quality degradation in some DRAM products sold in the past. After going through a process of in-depth analysis of due costs and thorough discussion with our customers, we were able to estimate the size of replacement and compensation for the affected customers. Therefore, we recognized KRW 380 billion in the first quarter as warranty provision, reflecting our best efforts to estimate most reasonable and fair amount at this point in time.
In addition, there was KRW 100 billion of one-off standard costs incurred in the process of establishing Solidigm as a stand-alone subsidiary. Aside from this, fair valuation at the time of acquisition late last year resulted in increased value of inventory and PPE, which then had the effect of increase in COGS and depreciation and amortization. It led to a general increase in expenses and, therefore, affected profitability in the first quarter. Depreciation and amortization in the first quarter was KRW 3.4 trillion increased by approximately KRW 0.61 trillion quarter-on-quarter, mostly a reflection of depreciation of the Dalian fab. As a result, EBITDA in the first quarter was KRW 6.26 trillion and EBITDA margin, 52%.
There was nonoperating loss of KRW 85.4 billion. This is including the net interest expense of KRW 76.7 billion as well as foreign currency-related net loss of KRW 16.5 billion despite the strong dollar as we had incurred translation loss on Kioxia investment due to the weak yen. Income before tax was KRW 2.77 trillion with corporate tax expense of KRW 0.79 trillion. Net profit was KRW 1.98 trillion with net profit margin of 16%. Consolidated cash balance at the end of Q1 was KRW 8.0 trillion, down by KRW 0.68 trillion from the end of last year.
Interest-bearing debt was KRW 18.11 trillion, increased by KRW 0.49 trillion quarter-on-quarter. The company’s debt-to-equity ratio and net debt-to-equity ratio at the end of Q1 was 29% and 16%, respectively, up slightly from the end of the year. Next is the company’s market outlook and plan. As was explained earlier, uncertainties increased in both the demand and supply size of the memory market. There are signs of demand slowdown for some consumer products like PC and mobile but the demand environment is expected to be generally favorable, with strong server demand throughout the year and mobile entering into seasonally better quarters in the second half.
On the other hand, supply growth is expected to be limited, held back by challenges in equipment procurement. By application, the server market is expected to enjoy strong demand throughout the year, thanks to growing investment by CSPs that is expected to be the largest since 2018. Along with replacement demand for servers invested in between 2017 and 2018, there will be growing demand for high-performance servers with the launch of DDR5 supporting CPUs. There is continuous upward adjustment of outlook for CSPs demand for server builds to aggressively expand data centers. With DDC’s build demand also growing, demand for server DRAM is expected to grow at high 20% level and eSSD demand at low 30% level this year.
PCs that recorded high growth in the past 2 years, unit shipment is likely to decline slightly year-on-year as we shift back to pre-pandemic life. Demand for enterprise PCs is expected to remain relatively robust, thanks to the back-to-office trend, but demand for consumer products is likely to soften due to decrease in non-face-to-face demand and rise in inflation. Some PC makers are suffering production disruptions due to lockdowns in some regions, but they mostly affect low to mid-end market. Demand remains strong for the high-spec products that adopt onboard type and DDR5 and gaming PCs. Thus, demand growth for PC DRAM for the year is expected at mid-single digit.
For client SSD, demand is expected to grow at mid-20% due to increase in NAND content along with growing adoption of Gen 4. The smartphone market is slowing down led by the Greater China region, with unit shipment growth expected to slightly underperform guidance at low single digit. However, growing portion of 5G smartphones in the low to mid-end market and the advances in wireless technology will drive continuous increase in content per box. In addition, the seasonal factor will start to turn around in the second half and LPDDR5 adoption will increase among high-end products which will gradually help recovery in mobile demand. Summing up the demand environment by application, although demand growth for PCs and smartphones will be slower than the initial outlook, it will be offset by the strong server demand.
Demand growth for DRAM will be maintained at the initial projection of high-teen percent, with the company’s DRAM shipment growth targeting the same level. In the second quarter, with growth in demand for computing products, the company’s DRAM shipment is planned at around mid-teen percent growth. Compared to the fourth quarter, to exclude the base effect in the first quarter, it will be a mid-single-digit percent growth. NAND demand growth for the year is maintained at the initial projection of around 30%. The company is again planning for shipment growth that outpaces market demand growth.
The company’s shipment, including Solidigm, is expected to nearly double that of SK hynix’ own NAND bits sold last year. In the second quarter, the company’s NAND shipment is planned to grow more than 20%, thanks to demand for server eSSD. Excluding Solidigm, the growth is planned at a similar level. But like DRAM, when compared to the fourth quarter, to exclude the base effect of low first quarter bit growth, the growth will be around mid-single-digit percent. Next, let me report to you the company’s technology and product road map.
1a nanometer DRAM and 176-layer NAND, which started mass production late last year, are showing gradual yield improvement and have increased in production portion. Sales of these most advanced tech products were focused on mobile products in the first quarter. Development is well underway as planned for the next-generation products, 1b nanometer DRAM and 238-layer NAND. But equipment delay delivery schedule has been affected due to supply disruption, which is also likely to delay mass production of the 1a nanometer and 176-layer. The company will try to minimize the impact and meet customers’ demand by improving yield and productivity.
Sales of DDR5 have been increasing mostly for PCs. With strong demand for gaming PCs, DDR5 adoption rate in the PC market is expected to outperform expectations by the end of the year. But DDR5 adoption for servers is to be slower than expected following the delay in CPU that supports DDR5. Since acquiring Solidigm, the company has been trying to develop areas of synergies. As an initial result, we have recently introduced the P5530, a high-performance eSSD, which is developed using SK hynix 128-layer NAND and Solidigm’s controller.
It is also a confirmation of the potential for technological synergy between the 2 companies. Solidigm’s product and customer bases are such that they are able to generate stable profits. And thus, we believe that Solidigm’s performances will be margin accretive to the company over the long term as the impact from one-off costs, such as standard cost, is gradually lifted. The company’s capital spending this year will increase from the previous year but the increment is mostly for construction and infrastructure to ensure long-term growth. Investment in fab equipment, which is directly linked to production volume, will be kept below the annual depreciation level.
Meanwhile, general increase in equipment lead times so far this year has also delayed equipment move-in for the company. This will distribute the investment from the first half to the second half. But for the year, the planned investment remains unchanged. Last, let me brief you on the company’s ESG activities and performance in the last quarter. To strengthen responsible management centered on the BOD, the company amended the rules on Independent Director Nomination Committee in March, which now require them to pay closer attention to global standards on independence and diversity when they make their nominations.
The amended rules also specify such detailed provisions that candidates for independent directors and their family shall not have received over $60,000 from the company, parent company or subsidiary in the past 3 years and that any member of their family shall not have had been hired as an executive in the company, parent company or subsidiary in the past 3 years. The rules also prohibit discrimination of candidates based on gender, race, religion, nationality, age and/or region. We have also explicitly stated that the need to abide by gender equality principles and strive to increase nomination and appointment of female independent directors based on the principle of gender equality. With these changes, we hope that the BOD will be better equipped to supervise the company’s management and lease sustainable development from a more independent and diverse perspective. Global ESG rating agency, Sustainalytics, has positively assessed the company’s effort at fundamental improvement in material and human resources and upgraded our ESG risk rating from medium to low.
They took note of the company’s preemptive climate change initiative, such as setting interim goals to achieve the RE100, improved efficiency in water resource risk management and improved employee gender diversity. The company will sustain and build upon our business and financial performance while safely implementing ESG management to become a best-in-class global company in every sense of the word. Thank you. With that, we’re now ready to take your questions.
Question-and-Answer Session
Operator
[Operator Instructions] The first question will be provided by Kim Sung Kyu from Daiwa Capital Markets.
Kim Sung Kyu
Thank you very much for giving me the opportunity to ask my questions. First of all, congratulations on the good performance. Now my question is related to demand. So we see that there are concerns growing over market memory demand in the second half due to some of the situations today, for example, the Ukrainian war as well as inflationary pressure and lockdowns in some parts of China. So what is the company’s view regarding the memory demand volatility?
So do you believe that there is demand volatility by major applications? And what is the company’s outlook for the second half?
Unidentified Company Representative
Now regarding the question, let me first respond on PC and mobile. Now as was mentioned in the question, we see that there are exogenous factors continuing as we move into the second quarter from the first. And because of this, we see that in the first half so far, demand has somewhat weakened for PC and smartphones, which are mostly for the consumer products. Now having said that, we see that for the PC, the demand in the second half of this year has not softened too much compared to the first half of last year. And then going into the second half of the year, there are a lot of commercial season events that are planned.
So we believe that manufacturing is going to pick up. So we also hope that the demand in the second half is also going to start to rebound. Now so far, I would say that the biggest demand factor would be the lockdowns underway in China. And depending on how they unfold in the future, there will be some questions that still remain with regards to the uncertainties over demand in the second half. But having said that, I do believe that there is going to be recovery in the build demand down the road.
And now regards — with regards to servers, now SK hynix has been conducting market research of its own, and we also are taking a look into the research from the outside. So when we combine our own market research and the results of the outside research, then we can see that despite the continuing exogenous factors in the first quarter of this year, we see that the company’s IT spend remains solid, if not increasing. And also — and so we see that in 2021, because of the COVID-19 pandemic, many of the new data centers that have been planned had been pushed back. And now it is coming back as a stronger server demand for 2022. So we see that compared to the — so what we are now seeing is that the companies are now trying to construct data centers in available zones that is at the level that is similar to what we have seen in the cloud boom year of 2018.
So again, the gist is that server demand is expected to remain quite strong throughout the year because the baseboard management, controller as well as the CPU and also what we call the ODM, which is the contract manufacturing set, we see that they’re all going to be quite strong going into the second half of the year. And also, there’s going to be the ramp-up of the 8-channel server CPU. So again, we believe that the server demand is going to be solid for the year. So to sum up, on one hand, there are still some uncertainties in demand for the consumer products. But then there is going to be quite a strong demand for servers, which we believe is going to more than offset the uncertainties in the demand in the consumer products like PCs.
Operator
The following question will be presented by J.J. Park from JP Morgan.
J.J. Park
Now my question first is about the warranty provision in the first quarter, which was in the amount of KRW 380 billion. So could you just explain a bit more about why this was necessary? So what were the reasons for allocating this warranty provision in the first quarter of this year? And another question, now I see that for both DRAM and NAND in the first quarter, the bit shipment growth was quite sluggish. But then in the second quarter, it is likely to pick up. So the sluggish bit shipment growth in the first quarter, was it because of a slower demand? Or was it a strategic move by the company to protect the price?
Unidentified Company Representative
Now first of all, the nature of the semiconductor product is that throughout the process of development, production, sales and even the use of the products, we have these endless iterations of identifying defects as well as the causes and making improvements. So it is bound to be this type of iteration that we need to have in order to keep improving the quality. So — and especially because the complexities of producing semiconductors is always rising, the iteration of identifying defects and making improvement are always about to be quite challenging. Now so having said that, meaning that they are bound to happen, I would still like to apologize on behalf of SK hynix for the fact that this issue has indeed occurred. Now then let me explain a bit more about the quality degradation issue that we have experienced recently.
Now this is — this actually goes back to the change in the DRAM production process that we had implemented in the middle of 2020 because, as you would remember, after the downturn in 2019, there was a sharp increase in both demand and supply in 2020. And at this time, we had also exacted some changes in our process. And in this changed production environment and also during a certain period of time of the production, some of the products that were produced at this particular time had been reportedly suffering some quality degradation since about 1 year ago. So we have been receiving reports of them sometime in the middle of last year. Then to sum up, now for some of the DRAM products that had been produced during a certain period in the middle of 2020, they began to suffer quality degradation in the middle of 2021.
So in the product that had been in very intense usage environment, meaning that these products have been — have started through software quality worsening after over 1 year of use. So what we have done as a follow-up is to identify the causes and we have also strengthened our quality validation process so that we will be able to minimize the possibility of the same issue occurring again. And we have had sufficient discussions with most of the customers to come out with a conversation plan. And most of the customers also wish for a replacement. So the replacement process will take place for the next 2 years or so.
And the impact of this has been reflected in the first quarter of this year. And as for the cost estimation, we have estimated the — we have recognized the cost at the most conservative level as possible. So we do not foresee any additional costs to arise from this particular issue. So on this occasion, the company has indeed strengthened its quality validation process, and we will make sure that we will validate our quality in a more thorough manner, so that we will be able to maintain our top-tier quality competitiveness. Moving on to your second question, now it is well known that in the memory business, there is the seasonality specific to each quarter. But then now for SK hynix, as we moved on from the second half of last year to the first half of this year, and especially in the first quarter of this year, the seasonality was a bit more pronounced for SK hynix in particular. Now normally, when we have our negotiations for the volume or price with the customers, then we can predict the next 3 months with — fairly accurately. And then also for the next 6 months, we can also make a reasonable prediction with a good expandability. But then it is after 6 months, that would be much more difficult to predict. Now in the fourth quarter of last year, hynix has had relatively better performance than others, for example, in terms of bit growth.
So as we had our negotiations in the fourth quarter of last year for the first quarter of this year, there was a reasonable agreement with the customers that the volume was going to be bigger in the fourth quarter. And meaning that in the first quarter, the bit growth was going to be a bit less. And then as a result of this, because of the base effect in the first quarter, now we are seeing that the bit growth for the second quarter is rising more precipitously, relatively speaking. So what I’m trying to say is that it was not the result of the company passively reducing sales or passively reacting to the given market environment. Rather, it was a result of our prior discussion and negotiations with the customers.
So these numbers have been predetermined. And what we have seen is this prior agreement coming into reality.
Operator
The following question will be presented by Nicolas Gaudois from UBS.
Nicolas Gaudois
So the first one is, as you mentioned earlier, we continue to see lengthened semiconductor manufacturing equipment lead times due to supply chain issues. Has this affected the delivery schedules for M15 and M16 in particular as well as tech migration to the point where actually you may see some bit shipment on site for either DRAM or NAND flash by the end of 2022 or even potentially in 2023? And related to that, considering the macroeconomic and geopolitical uncertainty we’re currently facing, and because you’re facing very long lead times for equipment, you may really have to formalized plans for 2023. And are those plans already affected by the current overall macroeconomic outlook? And secondly, going back to near term demand, we talked a little bit about H2, but do you actually see customers changing their purchasing behavior and how much inventories they are ready to carry as a reaction to the current macro uncertainty?
Unidentified Company Representative
Now the first question will be answered by myself, and then the other questions will be answered by those in charge of respective marketing departments. Now we have actually discussed this over the past several quarters, which is about the equipment lead time. And it is a real issue for us, and I’m not sure about other companies. But what SK hynix is doing is when we come up with our business plan, we are now doing it much earlier than what we normally do. So we plan for our business operations much earlier.
And so we see that the equipment lead time, because it is getting longer, it is also affecting, the — let’s say, the development or the migration to like 1a nanometer or the 176-layer. And so we see that it is actually causing real issues in terms of ramp-up for new tab or latest tag. Now normally, for a memory company, what we do is we would invest the bulk of our annual CapEx in the first half of the year. And then the CapEx such invested would then serve to support the bit growth for the year. And again, as I said earlier, we also — so now because of the equipment lead time delay, there could also be some issues with the tech migration to delay this technology.
And also, of course, we will try to achieve our wafer mix targets for the year. But because of the, let’s say, changes in the investment in the first half, it is also likely that there is going to be a slight dip or a slight delay in meeting our production bit growth target for the year. And it was also explained during the briefing earlier that we will try to improve our productivity in order to make up for any shortfall. To clarify what I had said earlier, so now in terms of the wafer mix, what I meant is that we would try to achieve the end image of the wafer capacity by the end of the year. But in terms of the wafer mix itself, it is likely that there is going to be some disruptions in our plan.
Now regarding your second question about whether there are any changes in the customer behavior in the face of such uncertainties or whether there are any changes in the inventory policy, now, in fact, what we have seen is there has been a growing need across the industry to build up buffer stock in the past 2 to 3 years because of the COVID-19 pandemic. And you said, we have also seen that the appropriate level of inventory as perceived by the customers has also gone up. And that is why there have been more talks of increasing safety volume with our major customers. And there have been increased discussions of the year-end volume lock-in over the past 2 to 3 years. And this is because, especially with the supply chain disruptions that we are seeing globally, there is also the perception among the customers that it is very difficult to respond to any changes in the demand or the product mix.
So for example, if I may cite PCs as a case in point, then compared to last year, we see that particularly this year, for PCs, some of the modules that are more sensitive to volatility, so for example, the DDR4 low-density modules or the DDR4 discrete products for PCs, so we see that their portion is going down. And that is because there is an increase in the proportion of some of the products or the modules that are more sensitive to demand. So for example, the DDR5 or the onboard, so we see that their proportion is increasing. And so what we are now seeing is that there is a, let’s say, improvement in the fundamentals of the supply and demand dynamics.
Operator
The following question will be presented by Ricky Seo from HSBC.
Ricky Seo
Now this is a follow-up question to the earlier one about the equipment delay. Now then because of this, in terms of the 1a nanometer or the 1z nanometer, the company’s initial guidance was about 25% in their portion by the end of the year. And also for the 176-layer, the initial guidance was 70%. And do you believe that now there will be some downside to these numbers? And then along with the equipment issues as well as other issues, then does the company believe that there is going to be some downward adjustment to the CapEx plan compared to the initial plan from the early this year?
And then the second question is looking at the progress in the 176-layer nano we see that the competitors, the other players, appear to be struggling. So SK hynix appears to be doing one of the best jobs in the development of DRAM — in the development. So what does the company believe to be its key development competitiveness? Could you give us a more detailed explanation.
Unidentified Company Representative
Well, first off, let me thank you for the chance to, let’s say, boast about our competency. I was feeling a bit heavy hearted because of the quality issues that I had explained earlier. Now regarding the equipment lead time, yes, the CapEx for the year, as I mentioned earlier, usually, the bulk of the CapEx will be concentrated in the first half. But because of the lengthening equipment lead time, now the CapEx is going to be spread out more evenly across the year. But now having said that, as I explained earlier, in terms of the wafer, then the capacity and image that the company has, we do not believe that there would be any issues in achieving the capacity and image based on the wafer.
That also means that in the first half of 2023, our production is going to remain as planned on schedule. But again, because of the equipment lead time, this means that most of the — so usually, we would plan to have the equipment move in, in the early part of the year. But now this means that this also has to be spread out more evenly across the year. So perhaps there might be some, let’s say, changes in the production plan for a particular period. So that means that the production volume is in terms of the — any damage to the production volume now, that is not going to be large.
And also, it is going to be to the extent that can be more than offset or covered by our improvement in productivity. So our confidence in the ability to meet the end image for the wafer capacity by the end of the year comes from the fact that we have spent ample time in coming up with our business plan. Now the supply chain issue is not something new. So we already had a lot of lead time in preparing for our business plan, we also have had sufficient discussions with our business partners in coming up with the plan. So that is why we are confident that despite the issues, we will be able to fulfill our targets by the end of the year.
And that is because you have been very agilely preparing for — prepare against the uncertainties. And the second question, you mentioned that the company appears to be ahead of other companies in terms of the latest tick ramp-up for NAND. And I would say that it could — it can be seen to be quite ironic because, as you would know, SK hynix is a — was a latecomer in the 3D NAND arena. And that is why we — as it is also well known, that is why we struggled for the past few years. But given that we were the latecomer, we also wanted to be ambitious in our efforts to catch up, meaning that we try to adopt the latest technology, perhaps earlier than the others at a pace that appeared to be a bit overboard at that time. For example, the latest technology or the component technologies like the 2-stack cell layering or having the logic, which is the peri area under the cell and also what we call the PUC, or the peri under cell. So these are types of component technologies that appear to be a bit too premature at the time for us to adopt. But we went ahead on this path, and so we also had to deal with a lot of difficulties also cost-wise as well. But now after struggling for a few years, now we were able to stabilize the technology platform as a result of it.
So while the other players are now trying to adopt the technologies, we are now in a more stable phase. So thanks to this stable NAND tech platform, we are now confident that we will be able to remain at the market top position in terms of product performance and production costs. And that is also why the company is trying to take the leadership in terms of aggressive bit growth that is going to be — that is going to outpace the market average.
Operator
The following question will be presented by Simon Woo from Bank of America Securities.
Simon Woo
So we see that even when accounting for the nonrecurring cost in the amount of like KRW 500 billion, then the earnings in the first quarter is quite stellar. So congratulations on that. And now I have some questions about the CapEx now. For the CapEx, when we look at the cash flow summary, then if there was CapEx in PPE, so investment in PPE, which is CapEx, so that was about in the amount of KRW 5 trillion in the first quarter. And aside from that, if you also include the investment, so the total investment was KRW 6 trillion.
And as was mentioned earlier, there is the delay in the equipment lead time. And despite this, I wonder why when we look at the financial statements, then why has there been the highest level of investment in the first quarter of this year? And also, when we look at just the investment side, then that itself is also KRW 1 trillion. So I wonder what was the background leading to this. And also for the past couple of years, there has already been heavy infrastructure investment. But then now the company is saying that there is going to be more infrastructure investment. And I wonder what would be the reasons for that because the M15, M16 have nearly been completed. The clean room is there already. So where are you going to see more infrastructure investment? And also for the wafer capacity.
So now what would be the conclusion at the end of the year? So is it going to increase from the previous year? Or is it going to remain flat? Because now with the DDR5 production as well as the 200-layer potentially occurring, then does this mean the accounting for them all is the wafer capacity, is it going to be flat? Or is there going to be a big increase?
Unidentified Company Representative
Now as was briefly mentioned during the question, now there is a difference between the timing of the investment and also the equipment being moved in. So when we look at the investment, so in terms of the CapEx, based on the equipment, the time of the equipment move-in, then that would be KRW 4 trillion of CapEx in the first quarter. And then on your question about the infrastructure investment, yes, for the fab as well as the equipment for the production, there has been — so that would be the CapEx for that, the fab and the equipment. And then in terms of the infrastructure, then there is the Yongin site. And then there is also the other infrastructure, especially in Icheon and Cheongju that is LNG-based power generation facilities.
So they are the indirect infrastructure to support production. So we also have investment into them as well. And because of them, I would say that perhaps the infrastructure investment appears to be quite large despite the heavy infrastructure investment that we have made over the past few years. But when we look at, for example, the LNG-based power generation facility, then over the long term, this is going to bring about quite a lot of upside to the company because it is going to be a long-term fixed-price LNG power generation. So we cannot just look at the current price to make fair assessment of the justification for this investment because when we look at the LNG-based power generation, then this means that the company will be assured of stable power supply down the road.
And also there are going to be quite a lot of upside from these facilities. So all in all, I do not believe that this investment is unnecessary. The last question about the wafer capacity, now for both DRAM and NAND, there is not going to be much change year-on-year. So it is going to be flat year-on-year. But now in terms of the wafer capacity, now they say that the tech cadence is getting longer.
And also, it is getting harder and harder to gain a lot of bit growth from new tech migration. And we also need to make sure that we ensure the enough supply to meet the demand coming from the market. So this means that we — so we perceive the need to keep increasing wafer capacity. So this also is, in a way, related to your second question, meaning that it is important for us to secure enough fab space. So this is going to be an increasingly important factor. So we are also looking into the various options of how to secure a fab space, including the Yongin site in order to increase our wafer capacity.
Operator
The last question will be presented by Peter Lee from Citigroup.
Peter Lee
Now my question is also pertaining to investment. So as was mentioned in the briefing earlier, there are a lot of macro issues as well as the delay in the equipment lead time. So what is the company’s plan for memory investment next year? And also what has been broadly covered in press reports, and that is about the Yongin site as well as the Cheongju new line. So could you also shed some light on the company’s plans regarding these facilities as well?
Unidentified Company Representative
Yes, it is true that the CapEx burden continues to increase. And especially starting next year, the CapEx numbers would also include the large-scale fab by Solidigm. So this means that — so on a consolidated basis, so this means that the CapEx numbers are going to increase, although, I mean it is not going to be on an apple-to-apple basis from the previous years. But anyways that is why there is a continuous increase in the depreciation and amortization as well. So for next year, my presumption is that CapEx is going to increase. But then when it comes to the CapEx that is directly related to production, in other words, that is directly related to bit growth, now for this type of bit growth or production-related CapEx, we would also make prior plans and discussions and review to be able to make adjustments according to the market circumstances. And also about the fab space, now of course, there is the Dalian fab, what we call the mode B. So there is going to be some fab expansion there. Then also the Phase 2 in Icheon and also the Phase 3 for M15. So investment is currently underway to secure fast pace in these facilities as well.
And then for the Yongin side, the land compensation is nearing the conclusion. So there is also going to be some increase in the cost here as well. And even before we decide to turn the Yongin site into fab, we would also have to look into the possibility of whether we need a fab — whether we need other fabs or not. So this is not decided yet. But if it is determined that we would also need to secure additional fab space elsewhere, then, of course, we would communicate this with the market in due time. Are there any further questions?
Operator
The next question will be presented by Hwang Min Seong from Samsung Securities.
Min Seong Hwang
Now from the discussion so far, I see that there are still quite a lot of uncertainties in the market regarding both demand and supply. But it appears as if the uncertainties over demand are higher than for supply because we talked about the equipment lead-in issues and also the difficulties involved with the tech migration. But then when we say the delay in the equipment lead-in, then we don’t know whether it’s going to be like 1 to 2 months or 5 to 6 months, meaning that it would be very difficult to gauge the potential impact of this delay. But now looking at the current situation then, let’s say, for the DRAM production, if it appears to be difficult to meet the target of high-teen percent growth, then what would be the outlook for next year? So does the company believe that this will be doable but perhaps with a little bit of complexity? Or what does the company see in terms of the DRAM production next year? And then the next question is, now for the quality defect, I was a bit surprised to hear that most of the customers wish for replacement. So if it is going to be replacement, then I wonder whether it is not going to affect the company’s ability to respond to the new orders coming in. So what would be the estimated volume necessary for this replacement? And does the company believe that this is going to, in any way, affect the demand and supply situation in the second half?
Unidentified Company Representative
Now those were a couple of tricky questions to answer. Now first of all, in an industry where the investment is quite large, regardless of the possibility of payback or the payback period and also when the return on investment is uncertain, then in such an industry, there are only a few players who can actually take part in that business. And I will say that, that characterizes the memory industry. So of course, there would be both pros and cons, but this means that there are only a few memory providers. And because of the fact that the memory providers are limited, I believe that there is a strong controllability across the entire supply chain.
And that is perhaps also the reason why, despite the numerous issues associated with the supply chain recently, there have been almost no major issues for the memory supply. And for our customers as well, like for example, automotive or the consumer electronics as well, we see similar phenomenon. But yes, so it appears as if the demand uncertainties are higher than the uncertainties from the supply side. But having said that, I do not believe that the demand uncertainties are going to get rid of or eliminate any increase in demand. So in other words, there might be some delay or disruptions in the demand or the demand being fulfilled. But over the mid- to long term, demand is bound to increase. So our projection of high-teen percent bit growth for DRAM and around 30% bit growth for NAND, we believe that this trend is going to continue for the next few years in both demand and supply side, so despite the demand uncertainties. That is why the company continues to try to stabilize our supply. And on your second question about the DRAM quality issue and also the need to replace them, having a potential impact on the demand, well, for DRAM, in particular, and also in general for hynix, we do not see this as a size that is big enough to affect our demand. So I will not say that it’s zero.
But again, it is not that large. So this replacement will take place over the next 2 to 2.5 years, and I do not see any impact on the new demand. Now having said that, again, the DRAM quality issue that we have experienced this time is something that we really have to look back on and also to take a review of. And we also have reviewed the entire company process and have held in-depth discussions to set the direction of improvement and improvement efforts are already underway so that the same issue will not repeat itself in the future. So we will take our lessons from this experience and try to make improvement so that this will not be repeated.
And also in terms of the business or the financial damage, we have already made sufficient review and also allocated sufficient warranty provision in a very conservative manner so that we do not foresee any additional damages to occur beyond the first quarter.
Seong Hwan Park
That concludes the SK hynix First Quarter 2022 Earnings Release Conference Call. Thank you very much for your participation.
