Hedge Funds Eye South Korea for AI Boom

Hedge funds looking for artificial intelligence-related stock market bargains are buying South Korean chipmakers, depending on a new wave of high-end memory chip demand and government investment

South Korean behemoths such as SK Hynix and Samsung Electronics, which have thus far lagged the sector’s rally, are being pursued by hedge funds in Asia that are seeking AI exposure.

These funds include Britain’s Man Group, Singapore’s FengHe Fund Management, Hong Kong’s CloudAlpha Capital Management, and East Eagle Asset Management.

Matt Hu, the chief investment officer of $4 billion FengHe, which has been purchasing Hynix and Samsung this year, asserted that Hynix is the queen of the AI story if we consider Nvidia the monarch.

FengHe and other hedge fund investors are of the opinion that the AI frenzy of the past year, which has tripled the value of U.S.-listed Nvidia’s shares to over $3 trillion, has disadvantaged equities like Hynix in comparison to more popular Asian AI players like Taiwan’s TSMC.

However, the attention is now focused on South Korean chipmakers as technology companies in the generative AI race compete to acquire high-bandwidth memory (HBM) processors, which are primarily produced by Hynix, Samsung, and U.S.-based Micron Technology.

Hynix is the primary supplier of cutting-edge HBM memory processors to Nvidia. According to Hu of FengHe, Hynix generates a greater percentage of its revenue from Nvidia than TSMC. However, Hynix is valued at 9 times its 12-month forward earnings, while TSMC is valued at 23 times.

Other broader tailwinds to 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 are in line with similar initiatives in Japan and China to enhance shareholder returns.

The benchmark KOSPI index experienced its most successful month in seven months in June as a result of the surge in hedge fund capital into South Korea’s AI sector. According to LSEG, South Korean equities have experienced the most significant inflows among Asia’s emerging markets thus far this year, and their largest inflows since 2008.

According to hedge funds, the substantial risks associated with investing in South Korea, such as restrictions on short-selling of shares in the local market and pressure from a depreciating Korean won, are outweighed by the potential benefits.

KOSPI is currently trading at a ratio of 10 times 12-month forward earnings, which is lower than the ratios of 18 times and 15 times for Taiwan and Japan, respectively.

INCREASED MEMORY

By market capitalization, Samsung and Hynix comprise approximately 30% of KOSPI. Samsung’s shares have increased by only 12% this year, while Hynix shares have increased by over 70%. The aggregate KOSPI has increased by nearly 9%.

South Korean suppliers have been further strengthened by the scarcity of broader memory chips, in addition to HBM chips. Samsung announced last week that it anticipated a more than 15-fold increase in its second-quarter operating profit as a result of the increasing cost of chips.

Sumant Wahi, a portfolio manager at Man Group who concentrates on technology equities, anticipates that the prices of traditional Dynamic Random Access Memory (DRAM) chips will also increase due to the chip industry’s decision to allocate an excessive amount of capacity to the production of HBM.

“There’s definitely an opportunity there,” he indicated. Given Samsung’s substantial underperformance in comparison to TSMC this year, Pierre Hoebrechts, the director of macro research at East Eagle Asset Management, anticipates that it will make up ground in the second half.

The South Korean AI motif is also expanding beyond chipmakers. This year, Chris Wang, a portfolio manager at tech-focused CloudAlpha Capital Management, has made an investment in HD Hyundai Electric, a manufacturer of electrical equipment, in anticipation that the stock will capitalize on the increase in power consumption. Since January, its shares have increased by 333%.

Simon Woo, Asia-Pacific technology research coordinator at BofA Securities, stated that Korea has the potential to sell a greater volume of semiconductor equipment, cooling systems, and consumer electronics in conjunction with the expanding AI ecosystem.

In addition, the ongoing Sino-U.S. technology conflict guarantees that China continues to utilize South Korea’s sophisticated memory chips, as Chinese chipmakers have been unable to compete while subject to U.S. export restrictions, Woo stated.