[Edaily Reporter Kim Kyung-eun ] SK hynix(000660) As the process for the mutual conversion between U.S. American Depositary Receipts (ADRs) and domestic shares begins, forecasts suggest that the arbitrage effect—which had been highly anticipated by the market—may be more limited than expected. This is because ADRs have plummeted below their initial public offering (IPO) price, weakening the incentive for arbitrage compared to before. Analysts note that, contrary to initial expectations, it is difficult to conclude that the ADR premium will shrink rapidly simply due to the start of the mutual conversion process.

According to the Korea Securities Depository on the 29th, applications for the mutual conversion between SK hynix’s domestic shares and ADRs will begin on the 30th. Under this process, when an investor applies for mutual conversion through a securities firm, the firm delivers the domestic shares to the Korea Securities Depository, and Citibank, acting as the depositary bank, issues the corresponding number of ADRs.

Initially, the market expected that once the conversion became possible, arbitrage trading—involving the purchase of domestic shares followed by their conversion into ADRs for sale in the U.S. market—would become active. The analysis was that arbitrage using relatively inexpensive domestic shares could gradually narrow the price gap between the two markets.

However, with the recent sharp drop in the price of SK hynix ADRs, the calculations surrounding arbitrage have become more complicated. On the 28th (local time), SK hynix ADRs closed at $130.17 on the New York Stock Exchange, down 8.98% from the previous trading day. This represents a decline of approximately 13% compared not only to the opening price ($170) but also to the initial public offering price ($149).

When converted to the value per share of the underlying stock using the ADR-to-underlying-stock exchange ratio (10:1), the value is approximately 1.88 million won. Compared to the closing price of the underlying stock (1.55 million won) on the same day (the 28th), the premium stands at around 21%. The ADR premium widened to 51% on the 14th, shortly after the listing, but showed a trend of narrowing as it fell to 28% on the 24th and 16% on the 27th. However, on the 28th, as the underlying stock fell more sharply, the price spread rose back into the 20% range.

Although the ADR premium remains high, it is expected to be difficult to act based solely on the price difference given the increased volatility. When converting between the domestic shares and ADRs, factors such as conversion costs, exchange rates, the time required for conversion, and transaction costs must be taken into account; furthermore, the possibility of the ADR price falling further before the conversion is completed must also be considered.

During a conference call that day, SK hynix stated, “Considering the ADR cases of other domestic companies, the ADR conversion process is expected to take several weeks or more,” adding, “However, the conversion of underlying shares into ADRs may be limited due to conversion procedures and ADR conversion limits.”

Analysts in the securities industry suggest that the actual market impact will depend on the scale of the new ADR issuance and supply-demand dynamics. The ADR conversion limit is set at 17.79 million shares—the number of shares issued this time—which represents 2.5% of the total issued shares. Excluding this amount, there remains capacity for an additional ADR issuance equivalent to 22.5% of the total.

Lee Jeong-bin, an analyst at Shinhan Investment Securities, said, “Although the application process for mutual conversion has begun, the extent to which the price discrepancy will actually be adjusted is expected to depend on the scale of the new ADR issuance and market supply and demand.” He added, “Given the conversion process and administrative hurdles involved in mutual conversion, it will not be easy for the premium to narrow immediately,” explaining, “While there is room for additional issuance based on registration criteria, the actual supply of ADRs will depend on the depositary’s operational procedures and approval conditions.”