There was a forecast from the securities industry that the American depositary receipts (ADR) of SK hynix(000660), which were recently listed on the Nasdaq, will receive a valuation comparable to Micron. It also said SK hynix's common shares are expected to see at least an 8%–18% boost from the ADR listing event.
On the 13th, DS Investment & Securities analyzed that SK hynix's ADR is similar to TSMC in its conversion structure. At present, the SK hynix ADR consists only of newly issued shares amounting to about 2.5% of total shares, and converting common shares into ADRs requires regulatory approval, making it impossible for the time being.
Conversely, converting ADRs into common shares is possible. If the ADR becomes cheaper than the common shares, arbitrage through conversion and selling is possible, but if the ADR becomes more expensive, arbitrage by converting to common shares is not possible.
Kim Su-hyun, head of research at DS Investment & Securities, said, "This is why ADRs transact at a premium to common shares, and TSMC has the same structure," adding, "However, if the gap widens, global funds that can access both markets can buy the relatively cheaper common shares, so the ADR premium cannot expand infinitely."
In TSMC's case, when ChatGPT 3.5 was released, the ADR jumped first and the common shares followed with a lag. In cumulative returns, about three-quarters of the ADR's rise was reflected in the common shares. The average premium of TSMC ADRs since listing is 16%, and at the highest it transacted at 24%–26%. In recent years, as the relatively cheap common shares rose, that gap narrowed to 14%.
It also projected that SK hynix ADRs will receive a valuation comparable to U.S. Micron. The 12-month forward price-earnings ratio (PER) is 5.5 times for SK hynix and 6.8 times for Micron, and Micron is currently transacting at a 24% premium.
Kim said, "Passive funds such as U.S. semiconductor exchange-traded funds (ETF) and Nasdaq index-tracking index funds, which have been unable to access SK hynix's common shares, are flowing into ADRs, so SK hynix ADRs are expected to receive a valuation comparable to Micron."
Accordingly, it analyzed that this narrowing of the valuation gap will contribute to a rise in the common share price.
Kim explained, "If you subtract the 14%–16% ADR premium, the minimum is 8.4%, and applying the three-quarters common-share transmission ratio from the TSMC case gives 18%," adding, "Regardless of industry conditions, the ADR listing event alone is expected to bring at least an 8%–18% boost to the common shares."
It also predicted that SK hynix will simultaneously maintain SK Square's equity stake through continued share buybacks and cancellations going forward.
With the new shares issued, SK Square's equity stake in SK hynix will fall from 20.5% to 20%.
Kim said, "Under the pre-amendment standard, the Fair Trade Act requires maintaining an equity stake of 20% or more, so SK hynix is expected to follow with share buybacks and cancellations," adding, "With SK hynix's share cancellations and the re-rating of the common shares, additional improvement in SK Square's net asset value (NAV) discount is expected at the same time."