Hedge funds turn to South Korea for next wave in AI

Hedge funds are flocking to South Korea’s chipmakers, anticipating a surge in demand for high-end memory chips driven by artificial intelligence and government investments.

Notable hedge funds, including Britain’s Man Group (EMG.L), Singapore’s FengHe Fund Management, and Hong Kong’s CloudAlpha Capital Management and East Eagle Asset Management, are seeking AI exposure in Asia by targeting South Korean giants like SK Hynix (000660.KS) and Samsung Electronics (005930.KS), which have yet to catch up with the sector’s rally.

“If we consider Nvidia the king of the AI story, then Hynix is the queen,” said Matt Hu, chief investment officer of the $4 billion FengHe, which has been investing in Hynix and Samsung this year.

Hedge fund investors, including FengHe, believe the AI boom that tripled the value of U.S.-listed Nvidia’s (NVDA.O) shares to over $3 trillion has overlooked stocks like Hynix, especially compared to more popular Asian AI players like Taiwan’s TSMC (2330.TW).

However, the focus is now shifting to South Korean chipmakers as tech companies in the generative AI race rush to secure high-bandwidth memory (HBM) chips, primarily produced by Hynix, Samsung, and U.S.-based Micron Technology (MU.O).

Hynix, a leading supplier of advanced HBM memory chips to Nvidia, is estimated to derive a larger portion of its revenue from Nvidia than TSMC does, yet trades at nine times its 12-month forward earnings, compared to TSMC’s 23 times, according to FengHe’s Hu.

Other factors supporting these shares include the South Korean government’s 26 trillion won ($19 billion) support package for the chip industry and its new ‘Corporate Value-up Programme’, which aims to enhance shareholder returns, similar to efforts in Japan and China.

The influx of hedge fund investments into South Korea’s AI sector contributed to the benchmark KOSPI index (.KS11) achieving its best month in seven months in June. South Korean stocks have attracted the strongest inflows among Asian emerging markets this year, with the largest inflows since 2008, according to LSEG data.

Hedge funds acknowledge the significant risks, such as pressure from a depreciating Korean won and restrictions on short-selling in the local market, but believe the rewards outweigh these challenges. KOSPI is trading at 10 times 12-month forward earnings, compared to Taiwan’s (.TWII) 18 times and Japan’s (.TOPX) 15 times.

Samsung and Hynix represent about 30% of KOSPI’s market capitalization. While Hynix shares have surged more than 70% this year, Samsung has risen only 12%, and the overall KOSPI nearly 9%. The scarcity of broader memory chips has further boosted South Korean suppliers, with Samsung expecting a significant rise in its second-quarter operating profit due to increasing chip prices.

Sumant Wahi, a portfolio manager at Man Group focusing on technology stocks, predicts a rise in prices of traditional Dynamic Random Access Memory (DRAM) chips due to the industry’s shift towards HBM manufacturing. Pierre Hoebrechts, head of macro research at East Eagle Asset Management, anticipates Samsung will catch up in the second half of the year due to its underperformance compared to TSMC.

The South Korean AI theme is expanding beyond chipmakers. Chris Wang, a portfolio manager at CloudAlpha Capital Management, has invested in electricity equipment maker HD Hyundai Electric (267260.KS), betting on increased power consumption. Its shares have risen 333% since January.

“Korea has the potential to sell more semiconductor equipment, cooling systems, and even consumer electronics along with the growing AI ecosystem,” said Simon Woo, Asia-Pacific technology research coordinator at BofA Securities.

The ongoing Sino-U.S. technology conflict also ensures China will continue using South Korea’s advanced memory chips, as Chinese chipmakers have struggled to compete under U.S. export bans, added Woo.

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