[Edaily Reporter kyoungeun kim ] With the price gap between SK hynix(000660) American Depositary Receipts (ADRs), listed on the U.S. Nasdaq, and the company’s domestic shares widening to nearly 50%, calls have emerged to narrow the gap by increasing the conversion limit that allows domestic shares to be exchanged for ADRs. Critics point out that, contrary to the government’s policy to resolve the “Korea discount,” it is difficult to continue ignoring a situation where the same stock trades at a lower price only in Korea.

Kim Soo-hyun, head of the Research Center at DS Investment & Securities, stated in a report on the 23rd, “The price disparity between SK hynix’s ADRs, which were listed on the Nasdaq in July, and its domestic shares has already exceeded 40 percent,” adding, “The two stocks share the same underlying assets and dividends; the only difference is that the voting rights for ADRs are held through a depositary bank—otherwise, they are identical in substance.” The monthly average price disparity widened from 25.6% in July to 34.2% in August and 40.0% in September, reaching 46.8% as of the 21st.

Center Director Kim expressed concern, saying, “The same stock is valued 40% higher in the U.S. but trades at a discount only in Korea,” and added, “This price discrepancy could be seen as a symbol to foreign investors that the Korean market is undervalued.”

He cited supply and demand as the reason for the divergence. While large amounts of capital that would not normally flow into the Korean stock market—such as funds resulting from the inclusion of U.S.-listed stocks in semiconductor indices via ADRs—entered the market, selling pressure continued on domestic shares. Center Director Kim analyzed, “Under regulations, investors with short positions cannot participate in the subscription, so some foreign institutions likely had to close out their short positions in advance,” adding, “After the subscription ended, short selling may have increased again, or hedging-related selling may have been added to the domestic shares.”

The problem is that there is no way to narrow the spread through arbitrage. Center Director Kim explained, “In a normal market, the spread would narrow if investors bought the cheaper domestic shares, converted them into ADRs, and sold them.” He added, “However, the 17.79 million-share limit for converting domestic shares into ADRs has already been filled by the public offering.” While it is possible to freely convert ADRs into domestic shares, the reverse is not allowed under the current structure. Even the recent 40 trillion won buyback of domestic common stock failed to reduce the spread.

He emphasized that, based on overseas examples, the spread is determined not by the proportion of ADRs but by whether conversion is possible. The spreads for Alibaba and Toyota, where underlying shares and ADRs can be freely converted in both directions, are around 0–2%. KB Financial Group(105560), ShinhanFinancialGroup Co.,Ltd.(055550), POSCO Holdings Inc.(005490), and KoreaElectricPower(015760)also have ADR weightings of only 2–6%, but because conversion is possible, their average annual spread is limited to 0.2–0.6%. In contrast, TSMC—where additional ADR supply has ceased since 2008 and re-deposit has been effectively blocked—has seen its spread widen again to 15–20% as U.S. demand has surged due to AI-driven growth.

As a solution, the report proposed expanding conversion limits and streamlining procedures. Although the number of ADRs registered by SK hynix with the U.S. Securities and Exchange Commission (SEC) represents approximately 24% of its issued shares, the limit the company has agreed to for converting common stock into ADRs is 2.4%. Under domestic law, converting common stock into ADRs requires the issuing company’s consent, and the company sets the conversion limit. Center Director Kim predicted, “Market demands will grow daily for the company to gradually raise the conversion limit and simplify procedures so that, within the set limit, conversions can be reported in a single filing rather than individually each time.”

SKSQUARE(402340)He also pointed out that the issue of SKSQUARE’s ownership stake is not a stumbling block. SK hynix determined the scale of its new ADR public offering with the intention of maintaining SKSQUARE’s stake at over 20%. However, Center Director Kim explained, “This restriction applies only to new shares,” adding, “If already-issued common shares are converted into ADRs, the number of shares remains the same, so SKSQUARE’s ownership stake will not change.”

He added, however, that there are variables to consider. Since ADR investors exercise their voting rights through a depositary and do not exercise them unless instructed to do so, an increase in the proportion of ADRs could alter the voting rights composition at shareholders’ meetings. Furthermore, SK hynix plans to raise 40 trillion won in July by issuing 17.79 million new ADRs at approximately 2.25 million won per share, and in August, it plans to repurchase and cancel 24.07 million domestic shares worth 40 trillion won. Center Director Kim stated, “It amounts to issuing shares at a high price in the U.S. and buying them back at a low price domestically; if the ADR premium persists, the company may conclude that it is advantageous to repeat this approach.” However, he added, “If this practice continues, critics may argue that it runs counter to the intent of the Commercial Act amendment, and in fact, it has not been very effective in narrowing the price disparity.”