[Edaily Reporter Kim Hyung-il ] SK hynix(000660) The price disparity between U.S. American Depositary Receipts (ADRs) and their domestic underlying shares has exceeded 40%. Although the mandatory lock-up period applied at the time of the ADR listing has been lifted, the price gap has not narrowed. This is because there is no available supply of domestic underlying shares that can be converted into ADRs, and arbitrage trading is not functioning smoothly due to overlapping factors such as transaction costs and supply-demand imbalances between the two markets. With SK Group Chairman Chey Tae-won leaving the door open for additional issuances, all eyes are on whether measures to narrow the spread will be discussed in the future.

According to MP Doctor on the 14th, SK hynix closed at 1,419,000 won, down 1.66%. Considering that SK hynix ADRs traded at $157.06 per share that day, the price converted to won is approximately 2,099,000 won, resulting in a price discrepancy of about 47.9% compared to the domestic common stock. An ADR is an American Depositary Receipt issued based on domestic stocks. Ten SK hynix ADRs are equivalent to one domestic common share. The fact that the ADR price—which reflects the exchange rate and conversion ratio—is higher than that of the domestic underlying stock means that the company’s shares are trading at a higher price in the U.S. market.

Typically, when the same asset trades at different prices in two markets, investors engage in arbitrage by buying in the relatively cheaper market and selling in the more expensive one. If domestic shares could be converted into ADRs and sold in the U.S. market, buying pressure would flow into the domestic shares while selling pressure would flow into the ADRs, potentially narrowing the price gap. However, in actual trading, the trading, settlement, and share conversion processes across both markets must be seamlessly integrated. Furthermore, the stated price discrepancy does not necessarily translate into a guaranteed return for investors.

Shin Jung-ho, head of the Research Center at LS SECURITIES, cited issuance limits and constraints in trading procedures as reasons why arbitrage does not proceed as smoothly as it does in theory. “If there is no room within the issuance limit, new ADR conversions may be restricted, and there are also constraints related to the underlying shares and settlement and custody procedures,” Shin explained. He added that since factors such as exchange rate fluctuations and transaction fees must also be considered, a large price difference between ADRs and underlying shares does not automatically lead to active arbitrage trading.

In fact, on SaveRo, the securities information portal of the Korea Securities Depository, the convertible volume of SK hynix ADRs into domestic shares is listed as 0 shares. SK hynix explained that the structure is such that existing ADR holders must first convert their ADRs into domestic shares before there is sufficient capacity to convert domestic shares back into ADRs. Even if an investor purchases domestic shares, it is difficult to execute arbitrage by selling them in the U.S. market if there is no capacity to convert them into ADRs. This means that a large price discrepancy alone does not guarantee that the difference can be realized as profit.

Although the 90-day lock-up period applied at the time of the ADR listing on the 7th has been lifted, this does not automatically increase the volume available for conversion between domestic shares and ADRs. While the lock-up is a measure related to selling restrictions on existing holders, the limits and procedures required to convert domestic shares into ADRs are separate issues. In other words, even though the selling restrictions on existing holders have been lifted, this does not mean that the volume of domestic shares that can be converted into ADRs and sold has increased.

Differences in supply and demand and investor sentiment between the two markets are also cited as factors influencing the price disparity. According to the Korea Exchange, from July 10—when the ADRs were listed—through October 13, foreign investors net sold SK hynix shares worth 27.4899 trillion won. During the same period, institutional and retail investors also recorded net sales of approximately 3.5904 trillion won and 5.0098 trillion won, respectively. Analysts suggest that while selling pressure on the domestic shares continues, differences in supply-and-demand conditions and investor sentiment between the U.S. and domestic markets may be contributing to the price gap.

Lee Jin-woo, Head of the Research Center at Meritz Securities, said, “In the domestic market, foreign selling has dominated for several months, resulting in a situation where there are no buyers.” Analysts also note that differences in market-specific premiums and risk premiums are factors explaining the price disparity. While the price gap could narrow if arbitrage trading proceeds smoothly, the disparity is likely to persist if conversion restrictions, market supply and demand conditions, and differing expectations regarding the semiconductor industry’s performance continue.

The possibility of additional ADR issuances is cited as a variable that could narrow the spread. In an interview with Bloomberg immediately following the ADR listing, SK Group Chairman Chey Tae-won indicated that the company could expand the scale of its ADRs if it could provide investors with good returns and maintain stable stock prices. The market is closely watching for any future comments on this matter. Currently, Chairman Chey has left the door open to future issuances, but this does not mean that a specific timing or scale has been determined.

While an additional ADR issuance could be a factor in narrowing the discount rate, its actual effect may depend on changes in the issuance method and conversion capacity. It is also necessary to examine how conversion limits and procedural constraints are resolved, as well as how domestic and international supply and demand and investor sentiment evolve. Center Director Lee stated, “It is highly likely that the discount rate will begin to narrow when investor sentiment toward the semiconductor sector improves and expectations for the industry’s performance rise.”