The match took place in Suwon amid heavy rain and intense public interest.
It marked the first visit by a North Korean sports team to South Korea in eight years.
Suwon took the lead early in the second half through Japanese striker Haruhi Suzuki.
However, Naegohyang responded quickly and scored the equaliser just six minutes later through Choe.
Later, striker Kim Kyong Yong scored the winning goal with a header in the 67th minute.
Suwon captain Ji So-yun missed a penalty in the closing stages after a VAR review awarded her side a spot kick.
More than 7,000 tickets sold out within hours before the rare North-South clash.
Still, torrential rain left many seats empty at the Suwon Sports Complex Stadium.
Supporters from civic groups attended the match to cheer for both teams. Meanwhile, Suwon fans created a lively atmosphere with drums and chants.
No official away supporters attended because North Korean citizens are generally not allowed to travel freely to the South.
Naegohyang will now face Tokyo Verdy Beleza in Saturday’s final at the same venue.
Tokyo Verdy secured their place in the final after beating Melbourne City FC Women 3-1 in the other semi-final.
The match will continue the spotlight on one of the tournament’s most talked-about storylines.
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