A fund that beat 99% of its peers this year says small Korean suppliers of chip materials and equipment offer richer pickings than memory chip giants.
(Bloomberg) — A fund that beat 99% of its peers this year says small Korean suppliers of chip materials and equipment offer richer pickings than memory chip giants.
The $300 million AssetPlus Korea Rich Together fund, managed by Kang Ja-In, is sitting on a 39% gain in 2023. The strategy is to sift for companies adding products or expanding into new markets, while also using a ratio of free cash flow to market value as a key criteria.
That means shunning the chip industry leaders Samsung Electronics Co. and SK Hynix Inc. While the price-to-earnings ratios for these two companies are low, their free cash flow is “significantly reduced by their huge capital expenditure every year,” Kang said in an interview.
“The companies on the chip supply chains such as materials and equipment makers seem a lot more attractive,” said the money manager at Seongnam-based AssetPlus Investment Management Co.
For example, Kang recently increased holdings in TEMC Co., an industrial gas provider that supplies to SK Hynix, to 5% on the bet that he will reap a more than twofold return.
Kang’s fund invests in both Korea’s benchmark Kospi index, as well as the Kosdaq Index, which tracks smaller stocks. It also outperformed 97% of its peers in the past five-year period with an annualized return of 9.16%, exceeding the 4.58% comparative return, according to Bloomberg data.
That’s thanks in part to early bets on the Korean entertainment sector, such as SM Entertainment Co., electric-vehicle suppliers like Seoyon E-Hwa Co. and defense suppliers including Hanwha Aerospace Co.
Kang said Hanwha is still attractive, even after a 79% year-to-date rally, given the size of the global defense industry is estimated to be about five times larger than the memory-chip sector.
Kang’s fund recently made these investment moves:
- Added a 5% stake in KNJ Co., a supplier of components used in the semiconductor wafer-etching process
- Buying shares of Jusung Engineering Co., a supplier of SK Hynix that is adding Intel Corp. as a client
- Taking profit in Lunit Inc.
- Selling its stake in Osstem Implant Co. during a tender offer
- Sold more than half its stake in SM Entertainment when there was a takeover fight, before adding some back after BTS label Hybe Co. backed down from the battle against Kakao Corp.
- Exited Jeio Co. after the EV battery-material supplier soared more than 50% following its listing debut
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