The U.S. premium for SK Hynix is set to stay after Korean regulatory ruling

By Jules Rimmer

Arbitrage opportunity for SK Hynix ruled out by Korean regulator

Demand for SK Hynix's memory chips has boomed in recent years and relentles demand shows no sign of letting up

The huge premium commanded by SK Hynix 's American depository receipts over its domestically-listed ordinary shares is likely to remain, after restrictions were put in place on the number of ADRs that can be created by converting local shares.

On Nasdaq Wednesday, SK Hynix ADRs (SKHY) closed at $165.27 but in premarket trading Thursday they had rebounded sharply and were indicating around 6.5% higher at $176. Compared to the Korean closing price of the ordinary shares (KR:000660) of 1.92 million won, this represents a premium of over 34% for the privilege of holding the U.S. line.

On Wednesday the Korea Securities Depositary said that the quota of SK Hynix shares enabled for conversion is just 2.5%. That was the size of the new listing on July 10 and given the issue was multiple times oversubscribed, international demand was not satisfied fully.

The only way in which ordinary shares can become ADRs is if someone were to convert ADRs to ordinaries and create room. Given the premium, clearly no one will do that.

Of course, for many international investors there is a good reason to prefer a U.S. listing from ease of transaction, lower commissions, counterparty risk, to the timing of market hours, liquidity and the simplicity of trading in dollars rather than the Korean won. Notwithstanding these arguments, 34% still seems hefty.

It is not without precedent, though. The most obvious comparison is Taiwan Semiconductor Manufacturing Company (TSM) (TW:2330), the ADRs of which have traded at a consistent premium but in a wide range of 2-100% during the three decades it has been quoted on the New York Stock Exchange. Indian, Argentinian and Russian depositary receipts have all traded at premia of varying degrees.

If no arbitrage is possible then the premium may often be dictated by sentiment towards emerging markets EEM in general and the propensity of U.S. investors to use exchange-traded funds as their investment vehicle.

While hedge funds cannot engage in riskless arbitrage, they can and probably will trade the spread. Overall demand for semiconductor stocks, as illustrated by the record-beating rally in the Philadelphia Semiconductor Index ETF SOX, will also play a key part in determining the premium.

If its main peer, Samsung Electronics (KR:005930), were to make a U.S. listing - as has been rumored- then it's possible this could dilute some of the demand for SK Hynix ADRs and serve to reduce the premium.

Another factor to consider is the currency. The Korean won (USDKRW) has been extremely weak in recent years, despite its enormous current account surplus. In the last week or so, however, the Bank of Korea hiked interest rates and the won has appreciated modestly. A stronger won will lower the premium if everything else remains the same.

The next catalyst for SK Hynix will be the eagerly-awaited announcement of second-quarter earnings on July 29.

-Jules Rimmer

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07-23-26 0704ET