Fitch Ratings: 'Profitability and cash flow has become much more uncertain' for Korean firms

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Fitch Ratings: 'Profitability and cash flow has become much more uncertain' for Korean firms

Published: 28 Apr. 2025, 12:49 Updated: 28 Apr. 2025, 15:11

Audio report: written by reporters, read by AI

Shelley Jang, director of Asia-Pacific corporate ratings at Fitch Ratings, sat down for an interview with the JoongAng Ilbo on April 21 to discuss U.S. tariffs' potential impact on Korean conglomerates. [FITCH RATINGS]

The tariff bomb triggered by U.S. President Donald Trump has heightened anxiety among Korean conglomerates heavily dependent on exports, as supply chains that companies have built over decades now face serious disruption. But what impact will this have on their credit ratings?

“Uncertainty surrounding cash flow for Korean companies, such as Samsung Electronics and SK hynix, is growing due to U.S. sanctions against China and tariff policies,” Shelley Jang, director of Asia-Pacific corporate ratings at Fitch Ratings, said in a video call with the JoongAng Ilbo on April 21.

“While credit ratings are unlikely to change immediately, there could be an impact over the medium to long term,” she added.

Jang oversees the annual credit evaluations for major Korean companies such as Samsung Electronics, which has a stable rating of AA-, SK hynix with a stable rating of BBB and LG Electronics, also with a stable rating of BBB.

A credit rating quantifies the probability of a company’s default. Fitch’s scale ranks AAA as the highest, followed by AA, A, BBB, BB, B, CCC, CC, C, RD (Restricted Default) and D (Default). Within the same rating, plus and minus symbols indicate relative standing. Ratings up to BBB are considered “investment grade,” while BB and below are deemed “speculative grade,” warning investors to exercise caution.

Q. What is the most important factor when assessing a company’s credit rating?

A. We primarily look at the visibility of cash flow generation. To achieve a credit upgrade, companies need not only improved financial metrics but also qualitative improvements in business risk. For example, better predictability in operating cash flow and a stronger market position are both crucial for an upgrade.

How is global economic uncertainty affecting Korean companies?

The impact is very negative. Samsung Electronics and SK hynix have invested heavily in building production bases in China, but U.S. restrictions have significantly undercut those efforts. These companies can no longer utilize their facilities efficiently relative to the amount they have invested. Adding to this, the Trump administration’s tariffs exacerbate the situation. Export-dependent Korean firms are facing a very unfavorable environment. From a credit evaluation standpoint, predictability of profitability and cash flow has become much more uncertain.

Samsung Electronics' offices in Seocho District, southern Seoul, is pictured on April 8. [YONHAP]

How significant is the impact of U.S. semiconductor export controls against China?

The impact is more indirect than direct. Semiconductors are part of a component-driven business model, so reduced end-market demand leads to lower GPU demand, which then affects memory chip demand. Moreover, the semiconductor industry relies on a tightly knit global supply chain, but the United States is now pushing for domestic production. This forces companies to restructure already optimized production bases, inevitably increasing investment costs and hurting profitability.

How are you factoring these risks into Korean semiconductor companies’ credit ratings?

Samsung Electronics’ massive scale and dominant market position provide it with a significant buffer. A temporary dip in performance would not immediately affect its credit rating. We still view Samsung’s rating headroom as sufficient. The more critical issue is whether Samsung can maintain its market leadership over the long term.

How do you assess Samsung Electronics’ market position?

The biggest warning sign is the erosion of its technology leadership. Samsung is falling behind in the high bandwidth memory (HBM) sector. In the foundry business, achieving its goal of expanding market share is also becoming difficult. Furthermore, as the Chinese government continues to support local chipmakers, Samsung could see weaker performance in traditional memory businesses like [dynamic random access memory] (DRAM) and NAND in China. Nevertheless, Samsung still has strong financial backing, and we expect it will leverage further investments to regain ground in the HBM sector.

SK hynix's headquarters in Icheon, Gyeonggi [YONHAP]

What about SK hynix?

SK hynix has established a strong leadership position in the HBM segment, which we view very positively. Since HBM sales are based on contractual agreements, there is less risk from market volatility. Prices are relatively stable, leading to a more predictable revenue structure. In fact, SK hynix is posting record-high results, which is strengthening its cash flow and financial base, a positive for its credit profile. However, external factors such as shifting tariff policies remain risks.

How close is China to catching up with Korean semiconductor technology?

Chinese companies can catch up to some extent, but it will be difficult for them to achieve a dominant market position. In the NAND flash sector, companies like Yangtze Memory Technologies have approached Samsung Electronics’ level in some respects. However, due to lower yields, their production costs are higher, making them still reliant on major players like Samsung and Micron [Technology] even within China. In DRAM, technological barriers remain high, so it is still difficult for Chinese firms to catch up.

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.
BY NA SANG-HYEON [[email protected]]