SK hynix strives to secure capital through ADR listing

SK hynix CEO Kwak Noh-jung speaks during a meeting on semiconductor strategy at the presidential office in Yongsan District, Seoul, Wednesday. Joint Press Corps

SK hynix is striving to secure capital for expanding memory chip manufacturing facilities, confirming on Wednesday that the company is weighing an offering of American Depositary Receipts (ADR) using its treasury shares.

“The company is reviewing various options to enhance corporate value, including a potential [ADR] listing on a U.S. stock market using treasury shares, but nothing has been finalized at this stage," SK hynix said in a regulatory filing.

Depositary Receipts (DR) are bank-issued financial securities representing shares in a foreign company, allowing investors to buy foreign stocks on their local exchange. Common types of DR include ADR, which are available on U.S. exchanges, and Global Depositary Receipts (GDR) for non-U.S. exchanges.

ADR has been mentioned as one of likely options for the chipmaker to finance its immense investment plans to increase its fabrication capacity. The company recently completed its M15X fab in Cheongju, North Chungcheong Province, and is building a semiconductor cluster in Yongin, Gyeonggi Province. Including them, the company said that it will need around 600 trillion won ($408.1 billion) over the next few years.

An artist's rendering of SK hynix's M15X fab in Cheongju, North Chungcheong Province / Courtesy of SK hynix

Among funding options, SK hynix is considering listing treasury shares through ADR offering apparently because of the company’s shareholding structure, which constrains raising capital through issuing new shares.

SK Group controls the chipmaker through a structure in which the group’s holding firm, SK Inc., controls SK Square, which in turn holds a 20.07 percent stake in SK hynix. Korea’s Fair Trade Act requires a first-tier subsidiary of a holding firm — SK Square — to own at least a 20 percent stake in a second-tier subsidiary — SK hynix.

Due to this requirement, SK hynix has faced limits on issuing new shares. Along with downside pressure on the company’s stock price, issuing new shares could weaken SK Group’s control over the chipmaker.

By launching an ADR listing of its treasury shares, SK hynix can secure capital without diluting the ownership of existing shareholders, as the structure involves depositing its existing treasury shares with a depository institution to issue ADRs.

The move is also viewed as a response to the National Assembly’s push to introduce a rule requiring companies to cancel their treasury shares. In November, the ruling Democratic Party of Korea tabled a bill that would force firms to cancel their treasury shares within a certain period, except for limited cases in an effort to improve shareholder value.

The details of the rule remain uncertain, but trusting treasury shares to a depository institution for an ADR offering could be deemed a disposal of those shares, because the company will not have control on the shares. Through this, SK hynix can find a way out from the mandatory cancellation.

Industry officials said the remaining question is whether the political community will allow SK hynix to move forward with the plan. The company will have to demonstrate that the ADR listing can enhance shareholder value in order to justify its plan.

Meritz Securities analyst Kim Sun-woo, who first floated the idea of ADR for SK hynix, said in a recent report that foundry giant TSMC and leading semiconductor equipment maker ASML are included in the PHLX Semiconductor Sector Index through their ADR listings, and that SK hynix could become the fifth-largest company on the index by market cap if it proceeds with an ADR offering.

“If pursued, passive funds tracking the index would flow in, and SK hynix would likely be compared with Micron in terms of valuation, given their similar rankings,” Kim said.

Following the filing, SK hynix's stock price improved 3.71 percent from a session earlier, closing at 587,000 won on Wednesday.

SK hynix has already launched a GDR listing in 2001, and the GDR is listed on the Luxembourg Stock Exchange.

The ADR plan is one of SK hynix’s recent efforts to secure capital. The company has been reportedly requesting the government to ease regulations on holding firms and rules separating commerce and finance, so that it can establish special purpose companies involving financial investors and raise funds for expanding its fabs.