Hedge Funds Bet on South Korean Chipmakers for AI Boom

Hedge funds are increasingly investing in South Korea's chipmakers, betting on the growing demand for high-end memory chips and government support to boost their value. Prominent funds such as Man Group, FengHe Fund Management, CloudAlpha Capital Management, and East Eagle Asset Management are targeting South Korean giants like SK Hynix and Samsung Electronics.

AI Demand and Investment Strategy

“If we consider Nvidia the king of the AI story, then Hynix is the queen,” said Matt Hu, chief investment officer of FengHe, which has been acquiring Hynix and Samsung stocks this year. Hedge funds believe the AI boom that tripled Nvidia's stock value has left opportunities in South Korean chipmakers. Technology firms in the AI race are increasingly seeking high-bandwidth memory (HBM) chips, primarily produced by Hynix, Samsung, and Micron Technology.

Market Performance and Valuation

Hynix, the leading supplier of HBM memory chips to Nvidia, is trading at nine times its 12-month forward earnings compared to TSMC's 23 times. The South Korean government's $19 billion support package for the chip industry and the new 'Corporate Value-up Programme' are additional growth drivers. These factors helped the KOSPI index achieve its best month in seven months in June.

Risks and Rewards

Despite risks like a depreciating won and short-selling restrictions, the potential rewards attract hedge funds. The KOSPI is trading at 10 times 12-month forward earnings, compared to Taiwan’s 18 times and Japan’s 15 times. Samsung and Hynix together account for about 30% of KOSPI’s market capitalization. Hynix shares are up over 70% this year, while Samsung has risen only 12%, and the overall KOSPI nearly 9%.

Broader AI Ecosystem

The scarcity of broader memory chips has further benefited South Korean suppliers. Samsung projected a more than 15-fold rise in its second-quarter operating profit due to rising chip prices. Hedge funds also see opportunities beyond chipmakers. Chris Wang, portfolio manager at CloudAlpha Capital Management, invested in HD Hyundai Electric, which benefits from increased power consumption. Its shares have surged 333% since January.

Impact of Sino-U.S. Technology War

The ongoing Sino-U.S. technology war ensures continued demand for South Korea’s advanced memory chips from China, as Chinese chipmakers struggle under U.S. export bans, according to Simon Woo of BofA Securities.