Hedge Funds turn to South Korean chipmakers for AI investment opportunities

Hedge funds seeking stock market bargains in artificial intelligence are increasingly turning to South Korea's chipmakers, betting on rising demand for high-end memory chips and significant government investment in the sector.

Among the hedge funds making moves are Britain's Man Group, Singapore's FengHe Fund Management, and Hong Kong's CloudAlpha Capital Management and East Eagle Asset Management. These funds are eyeing South Korean giants like SK Hynix and Samsung Electronics, which have not yet seen the same rally as other AI-related stocks.

"If Nvidia is the king of the AI story, then Hynix is the queen," said Matt Hu, chief investment officer at FengHe, which has been purchasing shares in both Hynix and Samsung this year.

FengHe and other hedge funds believe that while US-listed Nvidia has seen its value triple to over $3 trillion, stocks like Hynix have lagged behind, particularly compared to popular Asian AI players such as Taiwan's TSMC.

The focus is now shifting to South Korean chipmakers as companies in the generative AI race scramble to secure high-bandwidth memory (HBM) chips, primarily produced by Hynix, Samsung, and US-based Micron Technology.

Hynix, the top supplier of advanced HBM memory chips to Nvidia, is seen as undervalued. Hu estimates that Hynix derives a larger portion of its revenue from Nvidia than TSMC does, yet trades at nine times its 12-month forward earnings compared to 23 times for TSMC.

Additionally, the South Korean government's 26 trillion won ($19 billion) support package for the chip industry and the new 'Corporate Value-up Programme' are expected to boost shareholder returns, similar to initiatives in Japan and China.

This influx of hedge fund investment into South Korea's AI sector contributed to the KOSPI index's best monthly performance in seven months in June. South Korean stocks have seen the strongest inflows among Asian emerging markets this year, with the highest inflows since 2008, according to LSEG data.

Despite risks like a depreciating Korean won and local market restrictions on short-selling, hedge funds argue that the rewards outweigh these challenges. The KOSPI is trading at 10 times 12-month forward earnings, compared to 18 times for Taiwan and 15 times for Japan.

Samsung and Hynix represent about 30 per cent of the KOSPI's market capitalization. While Hynix shares have surged over 70 per cent this year, Samsung has increased only 12 per cent, and the overall KOSPI nearly 9 per cent.

The scarcity of broader memory chips has further bolstered South Korean suppliers. Samsung recently announced an expected more than 15-fold rise in its second-quarter operating profit due to rising chip prices.

Sumant Wahi, a portfolio manager at Man Group, expects traditional Dynamic Random Access Memory (DRAM) chip prices to rise as the industry shifts capacity to HBM production. Pierre Hoebrechts of East Eagle Asset Management anticipates Samsung will catch up in the latter half of the year due to its significant underperformance compared to TSMC.

The South Korean AI theme extends beyond chipmakers. Chris Wang, a portfolio manager at CloudAlpha Capital Management, invested in HD Hyundai Electric, betting it will benefit from increased power consumption. Its shares have risen 333 per cent since January.

"Korea has the potential to sell more semiconductor equipment, cooling systems, and consumer electronics as part of the growing AI ecosystem," said Simon Woo of BofA Securities. The ongoing Sino-US technology conflict also means China will continue to rely on South Korea's advanced memory chips, as Chinese chipmakers struggle under US export bans.

(With Reuters inputs)