[Edaily Kim Kyung-eun Park Sun-Yeop Reporter] SK hynix(000660) With U.S. American Depositary Receipts (ADRs) trading at a premium of over 50%, attention is focused on whether the price gap between ADRs and their domestic underlying shares will narrow in the future. While arbitrage has been difficult because the process of converting underlying shares into ADRs has been effectively blocked, the gap is expected to close as mutual conversion becomes possible starting at the end of this month. There is also speculation that the ADR premium could boost the appeal of investing in the underlying shares, potentially causing both prices to rise in tandem.

According to MP Doctor on the 15th, SK hynix closed at 2,082,000 won, up 169,000 won (8.83%) from the previous session. This is interpreted as a result of the rebound in semiconductor stocks on the New York Stock Exchange overnight. In particular, SK hynix ADRs closed at $193.92 on the 14th (local time), surging 27.29% from the previous trading day. Converted to the price of one common share in won, this amounts to approximately 2,887,000 won, which is about 51% higher than the previous day’s closing price of SK hynix’s underlying stock. Compared to the premium of about 3% at the time of the ADR’s listing on the 10th, analysts note that the price disparity between the ADR and the underlying stock has widened unusually sharply in a short period.

◇Mutual Conversion Starting on the 29th… Attention on Narrowing the Price Discrepancy

The market views the price discrepancy as resulting from structural constraints that make it difficult to convert the underlying shares into ADRs. Typically, when a price difference arises between ADRs and underlying shares based on the same underlying asset, the spread is narrowed through arbitrage trading. However, analysts note that since arbitrage trading—converting SK hynix’s underlying shares into ADRs for sale—is currently blocked, strong local buying demand has been reflected solely in the ADR price.

Once mutual conversion between the domestic shares and ADRs begins at the end of this month, the price discrepancy between the two markets is expected to narrow. According to the Korea Securities Depository (KSD), mutual conversion is expected to become possible starting on the 29th. When ADRs are redeemed and converted back to domestic shares, the requested amount will be transferred to domestic accounts without any separate issuance limits. Conversely, converting domestic shares into ADRs is only possible within the ADR issuance limit set by the issuer. Upon application by investors and the depositary (Citibank), KSD will verify the existing issuance volume and conversion ratio before processing the transaction within the remaining limit.

For example, if the available ADR issuance volume is 1 million shares based on the underlying stock, and the ADRs already issued are equivalent to 900,000 shares of the underlying stock, the volume available for additional conversion is limited to 100,000 shares. Once the issuance limit is fully exhausted, further conversion will be difficult even if an investor holds domestic underlying shares.

The market is closely watching how quickly the price gap between domestic underlying shares and ADRs will narrow once mutual conversion begins. Since the volume converted from underlying shares to ADRs is subject to the remaining issuance limit, actual conversion demand and the remaining available issuance volume are seen as key variables that will determine the pace at which the price disparity is resolved.

Kim Min-kyu, an analyst at KB Securities, stated, “The easier it is to convert between ADRs and domestic shares, the more fully the valuation expansion effect can be passed on to the domestic shares,” adding “Just as TSMC adjusted its ADR premium by increasing the proportion of ADRs relative to its total issued shares from 2.9% at the time of issuance to the current 20.5%, there is a strong possibility that SK hynix could also create a virtuous cycle of revaluation between the domestic shares and ADRs by adjusting its ADR premium,” he analyzed.

◇“ADRs: A Factor Driving Purchases of Underlying Shares, Not Foreign Capital Outflow”

Some analysts also suggest that the current spread is likely to gradually normalize, as it reflects the premium established during the initial listing phase. While concerns have emerged in the market that foreign investors might sell the underlying shares and shift their investments to the U.S. market, the explanation is that an expanding ADR premium actually enhances the investment appeal of the underlying shares.

In the case of TSMC, there was a tendency for foreign investors’ net purchases of the underlying stock to increase as the ADR premium rose. According to HYUNDAI MOTOR SECURITIES, global investors tended to buy the relatively cheaper underlying stock when TSMC ADRs traded at a price more than 25% higher than the underlying stock.

Kim Jae-seung, an analyst at HYUNDAI MOTOR SECURITIES, said, “From the perspective of global investors who have access to both the Korean and U.S. markets, there may be a tendency to buy the cheaper underlying shares rather than the more expensive ADRs.” He added, “It is reasonable to view the listing of SK hynix ADRs not as a structural factor driving foreign investors away from domestic underlying shares, but rather as an opportunity to create a new price discovery channel between the U.S. and Korean stock markets through the ADR premium.”