Lee Yeon-woo is a financial journalist at The Korea Times. Her wide range of reporting includes policies, macroeconomics, stock market, companies and even crypto. She is passionate about connecting the dots in Korean finance and making it easier for foreign nationals to understand. Based on her previous experience as a national reporter, she also has a keen interest in social issues within the sector, including gender equality and ESG. Your tips and insights are always appreciated. You can send them to yanu@koreatimes.co.kr.
SK hynix ADRs to follow Seoul-listed shares as premium narrows
An SK hynix logo is displayed during the company's Nasdaq debut in New York, Friday. Reuters-Yonhap
By Lee Yeon-woo
SK hynix's blockbuster Wall Street debut quickly delivered a lesson in how fast market swings can travel across the Pacific.
The chipmaker's Seoul-listed shares plunged 15 percent on Monday after the initial enthusiasm surrounding its U.S. listing faded and investors grew more concerned that the artificial intelligence (AI) boom may be nearing a peak. Its American depositary receipts (ADRs) then fell about 9 percent, narrowing the premium over the Korean shares.
The two securities should generally move in the same direction because they represent the same company, analysts said Tuesday. Even when their prices diverge, a widening gap typically attracts arbitrageurs, eventually pulling them back toward each other.
"A 15.4 percent KRX [Korea Exchange] decline against a 9 percent ADR decline in the same underlying asset is an arbitrage dislocation, not two different fundamental views," said Mo Aziz, an independent analyst at Smartkarma, an investment intelligence platform.
Still, differences in market structure mean the two securities will not trade in lockstep.
Part of the gap reflects the structure of the listing. SK hynix's ADRs can be converted freely into Seoul-listed shares, while conversions in the other direction require regulatory approval. That restriction limits arbitrage and allows strong overseas demand to keep the U.S.-listed securities trading at a premium.
With the ADRs trading well above the Korean shares, investors also have little incentive to convert them into the cheaper Seoul-listed stock. Differences in trading hours, currencies and investor bases can further widen short-term price gaps.
TSMC offers the closest comparison, as it has a similar ADR structure. The Taiwanese chipmaker's U.S.-listed shares initially led the gains after the launch of ChatGPT 3.5, while its Taiwan-listed stock followed with a lag and eventually captured about 75 percent of the ADRs's advance, according to Kim Soo-hyun, head of research at DS Investment & Securities.
Yet, TSMC's ADR premium widened to between 24 percent and 26 percent in the early stages of the rally before shrinking to 14 percent over the following years as its relatively undervalued domestic shares caught up. SK hynix's ADR premium has followed a similar pattern, narrowing to 19 percent after peaking at about 37 percent on Monday.
"The premium cannot widen indefinitely because global investors with access to both markets can buy the cheaper Seoul-listed shares as the gap grows," Kim said.
Investors are now watching two potential catalysts: inclusion in major U.S. equity indexes and the eventual emergence of more active arbitrage between the ADRs and the Korean shares.
SK hynix could be added to the Philadelphia Semiconductor Index as early as September 2027, according to Kim Min-gyu, an analyst at KB Securities.
Arbitrage is unlikely to develop quickly because converting Korean shares into ADRs remains restricted. Still, SK hynix has ample capacity to issue additional ADRs, according to Kim, which could eventually increase supply and help close the valuation gap, as happened with TSMC.
Another source of volatility may come from leveraged U.S. exchange-traded funds tied to SK hynix's ADRs, which are set to begin trading this week. With no daily price limits in the U.S. market, the products could magnify swings in the ADRs during periods of sharp trading.