Hedge Funds Target South Korean Chipmakers Amid AI Demand Surge

Hedge funds are pouring capital into South Korea's chipmakers, betting on a surge in AI-driven demand for high-end memory chips. Firms like SK Hynix and Samsung Electronics are attracting significant interest, bolstered by government support and technological advancements.

Asian Hedge Funds Bet Big on South Korean Chipmakers, Backed by AI Demand and Government Support

Hedge funds interested in artificial intelligence-related stock market bargains are investing in South Korea's chipmakers, anticipating that a surge in demand for high-end memory chips and government expenditure will increase their value.

South Korean behemoths such as SK Hynix and Samsung Electronics, which have thus far lagged the sector's rally, are being pursued by Asian hedge funds 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.

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

FengHe and other hedge fund investors think 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 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 (via Reuters), Hynix generates more significant revenue from Nvidia than TSMC. However, Hynix is nine times its 12-month forward earnings, while TSMC is 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 aligns 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 due to the surge in hedge fund capital into South Korea's AI sector. LSEG data indicates that South Korean equities have attracted the most significant inflows among Asia's emerging markets thus far this year and their most significant inflows since 2008.

Hedge funds say the rewards of investing in South Korea outweigh the significant risks, namely pressure from a depreciating Korean won and restrictions on short-selling shares in the local market.

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.

Samsung and Hynix Boost KOSPI Amid AI Chip Demand, Samsung Projects Profit Surge

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 risen by nearly 9%, according to Yahoo Finance.

The scarcity of broader memory chips, in addition to HBM chips, has strengthened South Korean suppliers. Samsung announced last week that it anticipated a more than 15-fold increase in its second-quarter operating profit due to 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 industry's substantial shift in capacity to the production of HBM.

"There's definitely an opportunity there," he said.

Given Samsung's substantial underperformance compared to TSMC this year, Pierre Hoebrechts, the director of macro research at East Eagle Asset Management, anticipates 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%.

"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.

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.