Why SK Hynix Shares Have Two Different Price Tags: What Happens When the Gap Narrows?

[Anchor]

It is Monday, and we are joined by reporter Han Jiyeon for our Friendly Economy segment. Han, today you are talking about SK Hynix stock.

[Reporter]

Currently, there is a price premium on SK Hynix’s U.S. ADR (American Depositary Receipt) compared to its domestic shares in Korea. Restrictions on the conversion between the domestic shares and the ADR are set to be eased on the 29th.

For those holding SK Hynix, you might wonder why there is such a large price gap for the same company's stock. Let me use a simple analogy.

Suppose the same pair of sneakers is sold at a lower price in Japan. People would naturally buy them in Japan and resell them in Korea, which would eventually narrow the price gap between the two countries.

However, if there were a rule stating that "sneakers bought in Japan cannot be brought into Korea," the price gap would not narrow. You can view the situation with SK Hynix in a similar light.

Currently, two-way arbitrage trading between the domestic shares and the ADR is effectively blocked. As a result, even though demand to buy ADRs surged due to the AI investment craze in the U.S., the difficulty in performing arbitrage to reduce the price gap caused the difference between the two to widen to as much as 51% on the 14th.

This will change starting on the 29th, as mutual conversion requests will become possible. However, the conditions differ depending on the direction.

There is no limit on converting ADRs into domestic shares, but conversely, depositing domestic shares to issue new ADRs is only possible within the registered issuance limit.

[Anchor]

So, in simple terms, it would only be meaningful if one could buy Korean shares and sell them as U.S. shares in sufficient quantities, right?

[Reporter]

Experts believe that once mutual conversion begins, narrowing the price gap is possible, but it is difficult for the premium to disappear completely.

Once the channel opens, arbitrage trading becomes possible by buying the relatively cheaper domestic shares and converting them into ADRs to sell in the U.S. In this process, demand to buy domestic shares will flow into Korea, while ADR supply will increase in the U.S., putting upward pressure on the domestic shares and downward pressure on the ADRs simultaneously.

Even considering the costs involved in the conversion, there is sufficient incentive for professional investors to engage in arbitrage trading.

However, the conversion is not completely free. The ADR issuance limit registered by SK Hynix is about 25% of the total shares, and since 2.5% was already issued at the time of listing, only 22.5% remains.

Furthermore, it is even more difficult for individual investors to actually use this. It is not something that can be done immediately via an MTS, or a securities firm's smartphone app, like buying overseas stocks.

Because it is a conversion request that must go through a securities firm, the Korea Securities Depository, and a U.S. depositary institution, it is not a simple trade. You have to apply separately through your securities firm and also go through foreign exchange-related reporting procedures.

[Anchor]

In the end, the price gap might not narrow that much.

[Reporter]

The key variable will be how freely one can move between the domestic shares and the ADR, which will dictate the price gap. The freer the movement, the closer the prices will be; the more restricted, the wider they will remain.

Looking at the cases of two overseas semiconductor companies, the Netherlands' ASML allows relatively free two-way conversion, so there is not a large price gap between its domestic shares and ADR. However, for Taiwan's TSMC, various conditions are attached to conversion and capital movement, so the ADR premium is maintained at a double-digit level.

For SK Hynix, the level of the premium may vary depending on how freely the conversion system is operated in the future.

There are two more variables here. One is the difference in trading hours. If a semiconductor-related issue breaks out in the U.S. after the domestic stock market closes, the ADR reflects this first, so the prices are bound to move differently for at least a day.

The other is the premium provided by the U.S. market itself. Since it is traded immediately in dollars, has abundant trading volume, and offers a variety of related options and ETFs, there are investors who place a higher value on this accessibility itself.

Also, mutual conversion is not necessarily bad news for domestic share investors. In the process of arbitrage trading, demand to buy the relatively cheaper domestic shares may actually flow in.

And as it happens, the 29th, when mutual conversion begins, is also the day SK Hynix announces its second-quarter earnings. Currently, securities firms' target prices for the stock are widely divided, ranging from 1.85 million won to the 4 million won range.

As these two issues overlap on the same day, volatility could be higher than usual.
※ Please note: This article was translated by AI and may contain errors.