Hedge funds turn to South Korea for next wave in AI

HD Hyundai Electric Co

11/07/2024 04:33

By Summer Zhen
       HONG KONG, July 11 (Reuters) - Hedge funds hunting for
artificial intelligence-related stock market bargains are
rushing into South Korea's chipmakers, betting a new wave of
demand for high-end memory chips and government spending makes
them more valuable.
    Britain's Man Group  EMG.L , Singapore's FengHe Fund
Management and Hong Kong's CloudAlpha Capital Management and
East Eagle Asset Management are among the hedge funds seeking AI
exposure in Asia that are looking to South Korean behemoths such
as SK Hynix  000660.KS  and Samsung Electronics  005930.KS ,
which have so far lagged the sector's rally.
    "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 believe the AI frenzy
over the past year that trebled the value of U.S.-listed
Nvidia's  NVDA.O  shares to more than $3 trillion has left
behind stocks such as Hynix relative to more popular Asian AI
players such as Taiwan's TSMC  2330.TW .
    But the spotlight is turning to South Korean chipmakers as
technology firms in the generative AI race scurry to secure
high-bandwidth memory (HBM) chips manufactured primarily by
Hynix, Samsung and U.S.-based Micron Technology  MU.O .
    Hynix is the top supplier of advanced HBM memory chips to
Nvidia. FengHe's Hu estimates Hynix receives a larger proportion
of its revenue from Nvidia than TSMC does, but Hynix trades at 9
times its 12-month forward earnings versus 23 times for TSMC. 
    There are other broader tailwinds to these shares, such as
the South Korean government's 26 trillion won ($19 billion)
support package for the chip industry and its new 'Corporate
Value-up Programme', along the lines of similar efforts in Japan
and China to improve shareholder returns.
    The rush of hedge fund cash into South Korea's AI sector
helped the benchmark KOSPI index  .KS11  register its best month
in seven months in June. South Korean stocks attracted the
strongest inflows among Asia emerging markets so far this year,
and their biggest inflows since 2008, according to LSEG data. 
    The rewards of being invested in South Korea outweigh the
big risks, hedge funds say, namely pressure from a depreciating
Korean won  KRW=  and restrictions on short-selling of shares in
the local market. 
    KOSPI is trading at 10 times 12-month forward earnings,
compared with Taiwan's  .TWII  18 times and Japan's  .TOPX  15
times. 
 
    MORE MEMORY
    Samsung and Hynix account for about 30% of KOSPI by market
capitalisation. 
    While Hynix shares are up more than 70% this year, Samsung
is up only 12% and the overall KOSPI nearly 9%.    
    Beyond HBM chips, scarcity in the supply of broader memory
chips has further bolstered South Korean suppliers. Samsung said
last week it expected a more than 15-fold rise in its
second-quarter operating profit, thanks to rising chip prices.
    Sumant Wahi, a portfolio manager at Man Group focusing on
technology stocks, expects prices of traditional Dynamic Random
Access Memory (DRAM) chips to rise too because the chip industry
has shifted too much capacity to manufacturing HBM. 
    "There's definitely an opportunity there," he said. 
    Pierre Hoebrechts, head of macro research at East Eagle
Asset Management, expects Samsung to catch up in the second half
due to its significant underperformance compared to TSMC this
year. 
    The South Korean AI theme is also broadening beyond
chipmakers. 
    Chris Wang, a portfolio manager at tech-focused CloudAlpha
Capital Management, has invested in electricity equipment maker
HD Hyundai Electric  267260.KS  this year, betting the stock
will benefit from the spurt in power consumption. Its shares are
up 333% since January. 
    "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. 
    The long-running Sino-U.S. technology war also ensures China
keeps using South Korea's advanced memory chips, given Chinese
chipmakers have so far been unable to compete while under U.S.
export bans, Woo added. 

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Monthly foreign investment flows into Asian equities     https://tmsnrt.rs/3KYLE0Q
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 (Reporting by Summer Zhen; Additional reporting by Rae Wee in
Singapore and Gaurav Dogra in Bengaluru; Editing by Jamie Freed)
 ((summer.zhen@thomsonreuters.com; 852-3462-7739;))