Hedge funds look to South Korea for next AI wave

By Summer Zhen

HONG KONG (Reuters) – Hedge funds looking for stock market bargains linked to artificial intelligence are flocking to South Korean chipmakers, betting on a new wave of demand for high-end memory chips and government spending that will make them more valuable.

Britain’s Man Group, Singapore’s FengHe Fund Management and Hong Kong’s CloudAlpha Capital Management and East Eagle Asset Management are among the hedge funds seeking exposure to AI in Asia, and are looking to South Korean behemoths such as SK Hynix and Samsung Electronics, which have so far lagged the sector’s recovery.

“If we think of Nvidia as the king of the AI ​​story, then Hynix is ​​the queen,” said Matt Hu, chief investment officer of FengHe, a $4 billion firm that bought Hynix and Samsung this year.

FengHe and other hedge fund investors believe the AI ​​frenzy over the past year, which has tripled the value of U.S.-listed Nvidia’s shares to more than $3 trillion, has left stocks like Hynix behind more popular Asian AI players like Taiwan’s TSMC.

But attention is now turning to South Korean chipmakers, as tech companies racing to develop generative AI scramble to secure high-bandwidth memory (HBM) chips made primarily by Hynix, Samsung and U.S.-based Micron Technology.

Hynix is ​​Nvidia’s top supplier of advanced HBM memory chips. FengHe’s Hu estimates Hynix gets a bigger share of its revenue from Nvidia than TSMC, but Hynix trades at 9 times 12-month forward earnings versus TSMC’s 23 times.

There are other factors supporting the stocks, such as the South Korean government’s 26 trillion won ($19 billion) support plan for the chip industry and its new “corporate valuation program,” in line with similar efforts in Japan and China to improve shareholder returns.

The influx of hedge funds into South Korea’s AI sector helped the benchmark KOSPI index post its best month in seven months in June. South Korean stocks have attracted the strongest inflows among emerging markets in Asia so far this year, and their largest inflows since 2008, according to LSEG data.

The benefits of investing in South Korea outweigh the significant risks, hedge funds say, including pressure from the depreciating Korean won and restrictions on short-selling stocks in the local market.

KOSPI trades at 10 times 12-month forward earnings, compared with 18 times for Taiwan and 15 times for Japan.

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Samsung and Hynix account for about 30% of the KOSPI in terms of market capitalization.

While Hynix shares are up more than 70% this year, Samsung is up just 12% and the overall KOSPI is up nearly 9%.

Beyond HBM chips, the shortage of broader-spectrum memory chips has further strengthened the position of South Korean suppliers. Samsung said last week it expects its operating profit to rise 15-fold in the second quarter, helped by higher chip prices.

Sumant Wahi, a portfolio manager at Man Group specializing in technology stocks, expects prices of traditional dynamic random access memory (DRAM) chips to also rise…

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