Investment bank UBS Group has advised investors to purchase American Depositary Receipts (ADRs) of SK Hynix while selling its shares listed in South Korea.

The recommendation is based on the assessment that the newly issued ADRs are highly likely to trade at a premium.

Bloomberg reported on July 7 (local time) that the UBS sales and trading desk issued this guidance in a client note ahead of the SK Hynix ADRs' scheduled listing on the Nasdaq on July 10.

The rationale is that ADRs are more efficient and cost-effective to hold and manage, making them potentially more attractive to hedge funds than Korean-listed shares. Furthermore, it will allow global portfolio managers who do not include Korean-listed stocks in their investment universe to purchase them.

In the note, UBS stated, "Buying the depositary receipts and shorting the domestic (Korean) line from day one is a no-brainer," adding, "Given the very limited dollar exposure to risk, it is highly scalable, and the possibility of it trading at a discount is very low."

Demand from global retail investors, who currently have low exposure to Korean-listed stocks, is also cited as a factor that will drive new inflows.

UBS noted, "While there has been some news of U.S. brokerages providing retail investors with access to Korean stocks, this is a recent development," and predicted, "Global retail ownership of SK Hynix remains low, and the ADRs will improve accessibility."

Bloomberg reported that investors are focused on whether the Korean shares and the ADRs will be mutually convertible.

According to filings with the U.S. Securities and Exchange Commission (SEC), ADR holders can cancel them to receive the corresponding Korean-listed shares. However, converting common shares into ADRs at a later date may be subject to restrictions, as it could require approval from Korean authorities.

UBS pointed out, "Investors will be paying attention to the available foreign ownership limit headroom that would be allowed for future conversions from SK Hynix's domestic listing to the U.S. secondary ADR listing," adding, "Without such headroom flexibility, the lack of accessibility makes it highly likely that the U.S. line will trade at a distinct and sustained premium."

In practice, U.S.-listed ADRs that do not allow for full mutual convertibility often trade at a premium compared to their home-listed shares.

For instance, the ADRs of Taiwan's TSMC, listed on the New York Stock Exchange (NYSE), traded at an average premium of 16% compared to its Taiwan-listed shares this month.