The conversion of funds raised by SK hynix(000660)'s American depositary receipt (ADR) issuance into won pulled down the won-dollar exchange rate, and large-scale shareholder returns by Samsung Electronics and SK hynix are being cited as an additional factor for a further decline.
However, the analysis said the actual impact on lowering the exchange rate could be limited, because only if all shareholder return funds are prepared by converting foreign currency—like the ADR case—can a similar level of effect be achieved.
Kwon A-min, an analyst at NH Investment & Securities, said in a report on the 26th that even reflecting expectations of dollar supply from recent shareholder returns, the first lower bound for the won-dollar rate is projected at 1,340–1,350 won. From the current level, the additional downside is seen at around 40–50 won.
The won-dollar rate has continued to fall in August, sliding to the high-1,300-won range. Last month, the conversion into won of funds raised by SK hynix through its ADR issuance led to a large amount of dollar selling, which was cited as a key driver of won strength. The ADR conversions that began in mid-July are estimated to have largely run their course after more than a month.
Analysts say that gap is now being filled by expectations of shareholder returns from Samsung Electronics and SK hynix. On the 19th, SK hynix announced a 40 trillion won share buyback and cancellation, and on the 21st, Samsung Electronics approved a shareholder return plan of about 90 trillion to 110 trillion won for this year. The confirmed amounts alone exceed 150 trillion won. Samsung Electronics will first pay about 30 trillion won in cash dividends in the third quarter, and the remaining methods and amounts of returns will be finalized in January next year.
NH Investment & Securities compared the potential scale of shareholder return funds impacting the foreign exchange market with the earlier SK hynix ADR.
Assuming SK hynix converted its ADR proceeds over 30 days, the daily conversion volume would be about 2% of the second-quarter average daily spot won-dollar trading volume of $43.7 billion.
Under the same assumption that all of Samsung Electronics' and SK hynix's shareholder return funds are converted over 60 days, SK hynix's 40 trillion won share buyback would account for about 1.1% of the average daily spot trading volume.
Samsung Electronics' cash dividend and employee share purchases are about 0.8% and 0.4%, respectively. Combined, this is roughly 2.3%, similar to the 2% from the earlier SK hynix ADR conversions.
Kwon said, "In terms of size alone, it is similar to the ADR factor," but added, "This assumes the entire funding is converted."
The actual dollars coming into the foreign exchange market are expected to be smaller than that. This is because Samsung Electronics and SK hynix can use won they already hold and cash flows from domestic operations. NH Investment & Securities estimated that 40%–50% of the actual shareholder return funding would be converted from foreign currency.
Dividend remittances abroad by foreign investors are also a variable that can offset the exchange-rate-lowering effect. Foreign ownership stakes in Samsung Electronics and SK hynix are about 47% and 51%, respectively. Even if the two companies pay dividends, if foreign investors reconvert them into dollars and remit them overseas, dollar-buying demand emerges, creating upward pressure on the won-dollar rate.
It was also noted that the sharp drop in July's exchange rate cannot be interpreted entirely as the effect of SK hynix ADR conversions. Government smoothing operations (fine-tuning) at the time and the possibility of joint intervention in the foreign exchange market with Japan may also have contributed to the won's strength.
Kwon concluded, "From the current level, the additional downside is around 40–50 won, and we view 1,340–1,350 won as the first support zone."
However, 60 trillion to 80 trillion won of Samsung Electronics' shareholder returns, for which the method has not yet been decided, remains an additional factor for a lower exchange rate. The specific method—such as cash dividends and share buybacks and cancellations—for that amount will be decided early next year after this year's results are finalized.