The significant price disparity between SK Hynix's American Depositary Receipts (ADRs) and its shares listed in South Korea is unlikely to be resolved in the short term.
On Thursday, the Korea Securities Depository (KSD) clarified that the cap for converting local shares into ADRs for SK hynix is set at 2.5% of the total shares outstanding. This entire quota was already utilized in the $26.5 billion ADR issuance completed on July 10th.
In a telephone interview, KSD CEO Rhee Yunsu stated that unless current ADR holders convert their receipts back into Korean shares to free up capacity, investors currently have no way to convert Seoul-listed shares into ADRs.
This structural constraint effectively blocks the normal cross-market arbitrage mechanism. The premium for SK hynix ADRs over the local Korean shares once reached as high as 51% and remained at an elevated level of approximately 33% as of Wednesday. The blockage of the conversion channel suggests this price gap could persist for an extended period, prompting a series of alternative positioning strategies in the market.
Arbitrage Mechanism Fails, Premium Remains High
SK hynix completed the largest-ever U.S. stock offering by a foreign company on July 10th. Since then, the pricing divergence between its ADRs and local Korean shares has become a focal point for the market.
Typically, price differences between ADRs and their corresponding local shares can be quickly arbitraged away through conversion operations that issue or cancel ADRs. However, the current conversion channel faces a double blockade. First, Citigroup, the depositary bank, issued a notice stating that the issuance and cancellation channels for the ADR program will be closed until July 29th because newly issued ordinary shares in Korea cannot be transferred before they are listed on the Korea Exchange. Second, the KSD's statement further clarifies that even if the channel reopens, the 2.5% conversion cap is already exhausted, leaving extremely limited available capacity. It also remains unclear whether additional regulatory approvals will be needed for subsequent conversions.
The combination of these two barriers leaves arbitrageurs with almost no opportunity to act. The premium for SK hynix ADRs once soared to a historical peak of 51% and was still about 33% higher than the local shares as of Wednesday.
Structure Similar to TSMC, Premium May Become the Norm
The KSD's statement reveals the structural characteristics of SK hynix ADRs, which are highly similar to the mechanism for Taiwan Semiconductor Manufacturing Company (TSMC) ADRs.
TSMC ADR holders can convert their receipts into local Taiwanese shares, but local shares cannot be freely converted into ADRs. This one-way mechanism has led to a persistent premium for its U.S.-listed shares. According to Bloomberg data, the average premium for TSMC ADRs over the past five years has been approximately 12.6%.
The situation for SK hynix is similar, but the premium magnitude is more extreme. Each SK hynix ADR represents one-tenth of an ordinary share. ADR holders can cancel their receipts and retrieve the Korean shares, but the reverse operation is strictly restricted. Analysts believe this structural constraint significantly increases the likelihood of the premium persisting over the long term.
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