SK Hynix ADR Premium May Hold Even After Share Conversion Opens July 29

SK Hynix ‘reverse kimchi premium’ persists

Conversion between SK Hynix common shares and ADRs to open on July 29

SK Hynix Inc.’s American depositary receipts may continue to trade at a premium to the company’s Seoul-listed common shares even after two-way conversion opens on July 29. Market participants say procedural hurdles, including limits on retail investors and foreign-exchange reporting requirements, will make meaningful arbitrage difficult.

As of July 17, mutual conversion between SK Hynix common shares in South Korea and its ADRs is expected to become available after July 29, when the newly issued shares tied to the ADR issuance are listed in South Korea.

The ADR premium over the underlying shares has widened to more than 50%. Before that, the market had expected the gap to narrow once conversion became possible later this month. Even though the ADR listing is still in its early stages, industry officials view the extreme divergence as a result of structural constraints that make it hard to convert common shares into ADRs.

Normally, price gaps between common shares and ADRs backed by the same underlying asset narrow through arbitrage. Investors buy in the cheaper market and sell in the more expensive one, pushing prices toward convergence. In SK Hynix’s case, however, arbitrage through converting common shares into ADRs and selling them has effectively been blocked. As a result, strong buying demand has been reflected only in the ADR price.

Even after two-way conversion begins, retail investors may still struggle to use the mechanism because of issuance caps and procedural restrictions.

The Korea Securities Depository said there is no separate limit when investors cancel ADRs and convert them into domestic common shares. Once a cancellation request is filed, the underlying shares are transferred to the applicant’s domestic securities account.

The reverse process is more restrictive. When investors deposit domestic common shares and receive newly issued ADRs for trading in the US, the Korea Securities Depository checks the ADR issuance ceiling set by the issuer. Conversions are processed only within the remaining limit.

For example, if the ADR issuance limit is 1 million shares on an underlying-share basis and 900,000 shares have already been issued, only 100,000 more shares can be converted.

In its Form F-6 filing with the US Securities and Exchange Commission during the listing process, SK Hynix registered up to 1.779 billion ADRs for issuance. That is about 10 times the size of this offering and roughly 25% of total shares outstanding.

Taiwan Semiconductor Manufacturing Co., a peer often used for comparison with SK Hynix, also allows investors to cancel ADRs and withdraw Taiwan-listed common shares freely. Converting Taiwan-listed common shares into ADRs, however, is subject to overall approval limits and regulatory restrictions.

Noh Dong-gil, an analyst at Shinhan Securities, said those arbitrage constraints have kept TSMC’s premium at 19.1% since 2024 and at an average of 17.5% so far this year.

There are also frictions in the trading process itself. South Korean retail investors who want to convert common shares into ADRs must file a separate application through their brokerage and complete foreign-exchange procedures.

Brokerages handle the process differently, so conversion is not immediate in the way overseas stocks are typically traded through mobile trading systems, or MTS, and home trading systems, or HTS, commonly used by retail investors.

Kim Jae-seung, an analyst at Hyundai Motor Securities, said TSMC has also shown a tendency for foreign investors’ net buying of common shares to increase as the ADR premium rises. When ADRs traded more than 25% above the common shares, investors tended to buy the relatively cheaper underlying shares.

Noh Jeong-dong, Hankyung.com reporter dong2@hankyung.com