In an attempt to capitalize on a potential upsurge in demand for premium memory chips and increased government investment, hedge funds are swarming South Korea’s chipmakers in search of AI-related stock market deals.
Hedge funds seeking AI exposure in Asia are looking to South Korean giants like SK Hynix and Samsung Electronics, which have so far lagged the sector’s rally. These include Britain’s Man Group, Singapore’s FengHe Fund Management, Hong Kong’s CloudAlpha Capital Management, and East Eagle Asset Management.
According to Matt Hu, the chief investment officer of $4 billion FengHe, which has been purchasing Samsung and Hynix this year, if Nvidia is the king of the AI tale, Hynix is the queen.
FengHe and other hedge fund investors think that equities like Hynix have lagged behind more well-known Asian AI competitors like Taiwan’s TSMC due to the AI craze that has swept across the industry over the past year, tripling the value of shares of U.S.-listed Nvidia to over $3 trillion.
However, as major companies in the generative AI race scramble to get high-bandwidth memory (HBM) chips made primarily by Hynix, Samsung, and U.S.-based Micron Technology, the focus is shifting to South Korean chipmakers.
Nvidia’s primary source for cutting-edge HBM memory chips is Hynix. According to Hu from FengHe, Hynix gets a bigger share of its income from Nvidia than TSMC, but Hynix is valued at nine times its 12-month forward earnings, compared to twenty-three times for TSMC.
Additional wider positives for these shares include the South Korean government’s 26 trillion won ($19 billion) chip sector support package and its recently announced “Corporate Value-up Programme,” which is modeled after comparable initiatives in China and Japan to increase shareholder returns.
June was the greatest month for the benchmark KOSPI index in seven months thanks to the inflow of cash from hedge funds into South Korea’s AI industry. According to LSEG data, South Korean stocks have seen the largest inflows since 2008 and the greatest inflows among Asia’s emerging markets thus far this year.
The benefits of investing in South Korea, according to hedge funds, exceed the major concerns, which include pressure from a declining value of the Korean won and limitations on short sales of shares in the local market.
While Taiwan is trading at 18 times and Japan at 15 times 12-month future profits, KOSPI is only trading at 10 times.
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By market capitalization, around 30% of KOSPI is made up of Samsung and Hynix. The KOSPI as a whole is up only 9%, Samsung is up only 12%, and Hynix shares have increased by more than 70% this year.
In addition to HBM chips, South Korean vendors have benefited from a shortage of wider memory chips. Due to increased chip prices, Samsung announced last week that it anticipated an increase in operational profit in its second quarter of more than 15 times.
Because the chip industry has transferred too much capacity to manufacturing HBM, Sumant Wahi, a portfolio manager at Man Group who specializes in technology companies, anticipates prices of traditional Dynamic Random Access Memory (DRAM) chips to climb as well. He stated, “There’s definitely an opportunity there.”
Given Samsung’s notable underperformance in comparison to TSMC this year, Pierre Hoebrechts, head of macro analysis at East Eagle Asset Management, anticipates that the two companies will catch up in the second half.
Beyond chipmakers, South Korea’s AI theme is expanding. This year, Chris Wang, a portfolio manager at tech-focused CloudAlpha Capital Management, made an investment in HD Hyundai Electric, a manufacturer of electrical equipment, with the expectation that the stock would profit from the spike in power usage. Since January, its shares have increased 333%.
In addition to the expanding AI ecosystem, Korea has the potential to sell additional cooling systems, semiconductor equipment, and even consumer electronics, according to Simon Woo, Asia-Pacific technology research coordinator at BofA Securities.
According to Woo, the ongoing Sino-US technology rivalry also guarantees China’s continued reliance on South Korea’s cutting-edge memory chips, since Chinese chipmakers have been unable to compete due to U.S. export restrictions.
