The price gap (premium) between SK hynix American depositary receipts (ADR) listed on the U.S. Nasdaq and the common shares listed on Korea's KOSPI has widened to about 51%.
As volatility has increased in Korea's stock market recently, SK hynix's common share price fell below 2 million won, while the ADR, buoyed by a semiconductor rally in New York overnight, surged.
According to the financial investment industry on the 15th, SK hynix ADR in New York overnight (on the 14th local time) closed at $193.92, soaring 27.29% from the previous session. Reflecting the exchange ratio between the ADR and the common shares (10 to 1) and converting to won, that equates to about 2,887,000 won per common share. That is a hefty 51.15% more expensive than the previous day's SK hynix common share closing price of 1.91 million won on the KOSPI.
Both the ADR and the common shares have the same underlying asset, SK hynix, but they are listed on the U.S. and Korean markets, respectively, and are influenced by different markets, so a price difference can occur.
Overnight in the United States, semiconductor stocks rebounded as expectations continued for the artificial intelligence (AI) investment boom. In addition, with U.S. consumer price inflation showing signs of slowing, expectations grew that the likelihood of a benchmark rate hike would fall. It is also analyzed that the start in earnest of derivatives transactions based on SK hynix ADR lifted the stock price.
In particular, the securities industry analyzes that a unique "mutual conversion structure" between SK hynix ADR and the common shares triggered this ultra-high premium. Currently, SK hynix ADR consists only of newly issued shares amounting to about 2.5% of total shares, so the circulating volume in the United States is extremely limited.
By contrast, the conversion direction between the two shares is asymmetric. Converting ADR into domestic common shares is possible at any time, but converting domestic common shares into U.S. ADR is effectively impossible for the time being because the pre-set ADR issuance cap blocks it. With the two-way arbitrage channel cut off, the resulting supply-demand imbalance has been the decisive cause of the abnormal premium exceeding 50%.
This structure is similar to that of Taiwan's semiconductor corporation TSMC. Since listing, TSMC ADR has recorded an average premium of about 16%.
Kim Su-hyun, head of research at DS Investment & Securities, said, "This is why ADR trades at a premium compared with common shares, and TSMC has the same structure," adding, "However, if the divergence widens, global funds that can access both markets can buy the relatively cheaper common shares, so the ADR premium cannot expand indefinitely."
Researcher Kim Jae-seung at Hyundai Motor Securities explained, "For TSMC, before the coronavirus, the ADR premium moved around 0% to 20%, and since 2022, when the AI revolution emerged, a premium of 10% to 30% has formed."
However, listing an ADR does not automatically add a premium. For POSCO Holdings, KT, and Korea Electric Power Corporation, which listed ADRs before SK hynix, the premium was minimal, and in some cases the ADR price was even cheaper than the common shares. As of the 14th, the price gap between POSCO Holdings ADR and its common shares was 1.22%, and Korea Electric Power Corporation was 0.47%. In KT's case, the common shares were about 0.52% more expensive than the ADR.
Researcher Kim Jae-seung analyzed, "What matters is not merely whether ADRs have been issued, but whether the corporations and industries are of interest in the current market," adding, "In the case of SK hynix, global interest is high due to the semiconductor cycle."
The securities industry also says the ultra-high premium on ADR does not mean the investment appeal of the common shares is diminished. Rather, there is a view that it could act as a strong catalyst to push up the common share price.
For Taiwan's TSMC, whenever the ADR premium expanded significantly, foreign investors showed a trend of net buying large amounts of TSMC common shares in the Taiwan onshore market.
Researcher Kim Min-gyu at KB Securities analyzed, "Just as TSMC adjusted its ADR premium by increasing the ADR share from 2.9% at issuance to 20.5% of total shares now, if SK hynix also adjusts future ADR supply, there is ample possibility of a virtuous cycle of revaluation in which the value of both the common shares and the ADR rises together."
Meanwhile, overseas analysis says the ADR price will inevitably remain higher than the domestic common shares for the time being. Bloomberg reported, "Given the constraints on converting SK hynix common shares into ADR, ADR has been expected to trade above the translated share price of SK hynix listed in Seoul."