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Hedge Funds Are Betting Big on South Korea’s Chipmakers Amid AI Boom
Hedge funds are increasingly focusing on South Korea’s semiconductor giants, anticipating a surge in demand for high-end memory chips driven by the artificial intelligence (AI) sector and substantial government investment. Major funds, including Britain's Man Group, Singapore's FengHe Fund Management, and Hong Kong's CloudAlpha Capital Management, are actively investing in South Korean powerhouses like SK Hynix and Samsung Electronics, whose stock performance has lagged behind the broader sector rally.
South Korean Chipmakers in the Spotlight
Matt Hu, FengHe’s chief investment officer, asserts that SK Hynix plays a pivotal role in the AI landscape, similar to Nvidia. Despite Nvidia's considerable market gains, SK Hynix and its counterparts have exhibited relatively modest performance, now drawing significant attention as leading suppliers of high-bandwidth memory (HBM) chips crucial for generative AI technologies. Currently, SK Hynix is the principal supplier of advanced HBM chips to Nvidia, positioning itself advantageously within the AI supply chain.
Government Support and Market Movements
South Korea’s government is bolstering the chip industry with a 26 trillion won ($19 billion) support package and the newly introduced 'Corporate Value-up Programme', aimed at enhancing shareholder returns. These initiatives, combined with hedge fund investments, have contributed to the KOSPI index’s best monthly performance in seven months this June. South Korean stocks have also seen the strongest inflows among emerging Asian markets this year, marking their highest inflow level since 2008.
Although hedge funds recognize risks such as a declining won and limitations on short-selling, they argue that the potential benefits from these investments surpass the downsides. The KOSPI index trades at a relatively lower multiple of 10 times 12-month forward earnings, compared to Taiwan's 18 times and Japan's 15 times.
Performance and Market Dynamics
Samsung and SK Hynix represent approximately 30% of the KOSPI index's market capitalization. While SK Hynix shares have climbed over 70% this year, Samsung has seen a more modest rise of 12%, against a nearly 9% gain for the KOSPI. Supply constraints for broader memory chips and rising chip prices have further strengthened the position of South Korean suppliers. Notably, Samsung recently forecasted a significant increase in its operating profit for the second quarter, driven by escalating chip prices.
Man Group’s portfolio manager, Sumant Wahi, projects a rise in traditional Dynamic Random Access Memory (DRAM) chip prices due to the industry's focus on manufacturing HBM chips. Pierre Hoebrechts from East Eagle Asset Management anticipates that Samsung will recover its performance in the second half of the year.
Broader AI Opportunities
The AI investment theme in South Korea extends beyond chip manufacturers. Chris Wang from CloudAlpha Capital Management has invested in HD Hyundai Electric, expecting the company to benefit from the increased power consumption linked to AI growth. This stock has soared 333% since January. Simon Woo from BofA Securities underscores South Korea’s potential to expand its semiconductor equipment, cooling systems, and consumer electronics sales, supported by the growing AI ecosystem.
The ongoing U.S.-China technology conflict further ensures a steady demand for South Korea's advanced memory chips, as Chinese manufacturers continue to grapple with U.S. export restrictions.
