Overview
SK Hynix’s newly introduced American depositary receipts (ADRs) are commanding a significant markup relative to the company’s shares listed in South Korea, highlighting heightened investor appetite for AI-related memory-chip exposure.
Structure and pricing of the ADRs
The ADRs that began trading in New York earlier this month are each backed by one-tenth of a Seoul-listed SK Hynix share and can be converted into the underlying Korean stock. Since their market debut, the premium on the ADRs - after adjusting for currency - has fluctuated between 16% and 51%. At the close on Friday the gap stood at roughly 29%, meaning U.S. investors were paying nearly a third more for the ADRs than for the equivalent position in Korea.
Why arbitrage is not closing the gap
In many cases, differences between a company’s domestic shares and its ADRs are reduced through arbitrage. Traders can buy the cheaper instrument, convert it into the more expensive one and sell the latter until prices align. Here, however, the one-way convertibility of SK Hynix’s ADRs complicates that strategy. While ADR holders can convert receipts into Korean-listed shares, regulatory constraints make reversing that process difficult without approval from the company.
That limitation leaves hedge funds that might buy Seoul shares and short the ADRs exposed if the premium widens, because they lack a reliable, low-risk mechanism to convert the Korean stock back into ADRs. As a result, the valuation gap has persisted rather than being arbitraged away.
Possible factors supporting a premium
Certain practical considerations provide some justification for a positive premium on ADRs. U.S. trading and custody costs can be lower, there is no South Korean transaction tax on the ADRs, and their dollar denomination is convenient for American investors. Additionally, U.S. exchange-traded funds may find ADRs more attractive from a tax-handling perspective. Historically these factors have supported modest premiums only.
For context, Taiwan Semiconductor Manufacturing Co.'s ADRs averaged a 3.2% premium from 2010 through 2020. Since the rise of large language models beginning in 2022, TSMC’s ADR premium has climbed to roughly 15% as U.S. demand for AI-focused semiconductor exposure increased. SK Hynix’s present premium, by comparison, is substantially larger.
How the premium could adjust
The disparity could shrink if Seoul-listed SK Hynix shares appreciate, if demand for the New York receipts cools, or if SK Hynix issues additional U.S.-listed securities. ADR holders would face greater downside risk if the convergence occurs via a decline in the price of the New York-listed receipts rather than an appreciation in the Korean shares.