Hedge funds targeting artificial intelligence-related stock market bargains are increasingly turning to South Korea’s chipmakers. They are betting that a new wave of demand for high-end memory chips and substantial government investment will enhance their value.
Key Players and Investments
- Hedge Funds Involved:
- Britain’s Man Group (EMG.L)
- Singapore’s FengHe Fund Management
- Hong Kong’s CloudAlpha Capital Management
- East Eagle Asset Management
- Target Companies:
According to Matt Hu, chief investment officer of FengHe Fund Management, Hynix is akin to the “queen” in the AI landscape, with Nvidia being the “king.” FengHe has been actively purchasing shares in both Hynix and Samsung throughout the year.
The interest in these South Korean companies is spurred by the significant increase in Nvidia’s stock value, which tripled over the past year to surpass $3 trillion. This surge has left other stocks, such as Hynix, relatively undervalued compared to more popular Asian AI players like Taiwan’s TSMC.
Hynix is currently the leading supplier of advanced high-bandwidth memory (HBM) chips to Nvidia. Hu estimates that Hynix derives a larger portion of its revenue from Nvidia than TSMC does, yet it trades at a significantly lower multiple of its forward earnings (9 times compared to TSMC’s 23 times).
- Government Support:
- 26 trillion won ($19 billion) support package for the chip industry
- ‘Corporate Value-up Programme’ aimed at enhancing shareholder returns
This wave of hedge fund investments has driven the benchmark KOSPI index to its best performance in seven months this June. According to LSEG data, South Korean stocks have attracted the strongest inflows among Asian emerging markets this year, marking their highest inflows since 2008.
Despite the risks, including a depreciating Korean won and restrictions on short-selling in the local market, hedge funds see significant rewards in investing in South Korea. KOSPI is trading at 10 times its 12-month forward earnings, compared to Taiwan’s 18 times and Japan’s 15 times.
| Company/Index | Market Capitalization | YTD Performance | Forward Earnings Multiple |
|---|---|---|---|
| SK Hynix | 30% of KOSPI | +70% | 9x |
| Samsung | 30% of KOSPI | +12% | 10x |
| KOSPI | 2,891 | +9% | 10x |
| TSMC | 28T | N/A | 23x |
| Taiwan Index | 24,390 | N/A | 18x |
| Japan Index | N/A | N/A | 15x |
While Hynix shares have surged over 70% this year, Samsung has seen a modest 12% increase, with the overall KOSPI rising nearly 9%.
Beyond HBM chips, the supply scarcity of broader memory chips has further strengthened South Korean suppliers. Samsung recently announced a more than 15-fold rise in its second-quarter operating profit due to increasing chip prices.
- Dynamic Random Access Memory (DRAM):
- Prices expected to rise due to industry shift towards HBM manufacturing
- Potential for significant profit increases
Sumant Wahi, a portfolio manager at Man Group focusing on technology stocks, sees an opportunity in the rising DRAM prices.
Pierre Hoebrechts, head of macro research at East Eagle Asset Management, expects Samsung to catch up in the second half of the year due to its notable underperformance compared to TSMC.
The South Korean AI theme extends beyond chipmakers. For example, Chris Wang, a portfolio manager at CloudAlpha Capital Management, has invested in HD Hyundai Electric (267260.KS), predicting that the stock will benefit from the increased power consumption due to the AI boom. HD Hyundai Electric’s shares have surged 333% since January.
- Additional Opportunities:
- Semiconductor equipment
- Cooling systems
- Consumer electronics
Simon Woo, Asia-Pacific technology research coordinator at BofA Securities, believes that Korea has the potential to expand its market in these areas along with the growing AI ecosystem.
The ongoing Sino-U.S. technology war also ensures that China continues to rely on South Korea’s advanced memory chips. Chinese chipmakers have been unable to compete due to U.S. export bans, according to Woo.
Featured Image courtesy of DALL-E by ChatGPT