Why Won't SK Hynix's ADR Premium Last? Analysts Reveal the Key

According to MarketWatch, SK Hynix (SKHY-US) closed at $193.92 on Tuesday, representing a premium of approximately 38% compared to its closing price on the Seoul exchange on Wednesday. How long can this high premium last? The answer may be: not for long.

If the Korea Securities Depository (KSD) opens two-way conversion between ADRs and local shares as scheduled by the end of this month, the high premium is likely to rapidly converge.

Of course, some premium may persist, as U.S. investors typically prefer dollar-denominated assets traded locally, which offer convenience. ETFs also have similar demand. However, once ADRs become available for short selling and are allowed to convert freely with Korean shares, most of the premium will be eliminated through arbitrage trading.

Arbitrage is not cost-free. Both sides of the trade incur commissions and transaction costs. Creating ADRs requires conversion fees, and borrowing ADRs for shorting incurs lending costs. Yet, compared to the current 38% premium, these costs are negligible. Provided no other unexpected barriers arise, hedge funds and proprietary trading desks will likely rush into arbitrage opportunities.

According to Korean media, the Korea Securities Depository stated that applications for converting ADRs and local shares will begin on July 29. Coincidentally, that day also marks SK Hynix’s second-quarter earnings release.

SK Hynix’s ADR already dropped 9% on Wednesday, signaling the beginning of premium convergence. Notably, when the ADR was first priced last week, it had only about a 3% premium over its Korean shares.

Options on SK Hynix ADRs also began trading on Tuesday. As a result, if investors buy call options betting on further price increases, derivatives dealers may need to hedge by buying the underlying stock, further influencing price movements.

Another factor to watch is how many ADRs the Korea Securities Depository ultimately allows to be created. For example, Morgan Stanley’s trading desk currently estimates that convertible ADRs could amount to about 2.5% of SK Hynix’s outstanding shares. The stricter the conversion limits, the higher the ADR premium tends to remain.

ADR premiums are also influenced by sentiment toward emerging market investments. When investors favor emerging market assets, ADR premiums typically widen; conversely, when capital exits emerging markets, premiums may shrink.

Market liquidity is equally important. If Nasdaq trading volume continues to rise, investor willingness to hold ADRs will increase. On Tuesday, U.S. market turnover was about $280 million, while South Korea’s market turnover on Wednesday reached approximately $8.5 billion—far exceeding the U.S. level. On that day, SK Hynix’s Korean shares closed up nearly 9%.

Another factor that could drive ADR premium convergence is Samsung Electronics potentially launching its own ADR in the future. Samsung is South Korea’s largest company by market cap and a direct competitor to SK Hynix in multiple business areas.

If Samsung can attract U.S. investors to the memory chip sector, SK Hynix will no longer be the sole option, potentially reducing demand for its ADR.

TSMC offers a useful precedent.

Taiwan Semiconductor Manufacturing Company (TSMC-US), the world’s largest semiconductor foundry, may serve as a valuable reference. Currently, TSMC’s ADR trades at an 11% premium to its Taiwan-listed shares. However, over the past decades, its premium has fluctuated widely—from lows of 1% to 2% to a high of 26%.

As U.S. investors actively participate in the AI capital expenditure supercycle, TSMC’s trading volume has gradually shifted to U.S. markets, where it now accounts for about 60% of total trading volume.

The semiconductor investment landscape will welcome more competitors. Chinese DRAM manufacturer ChangXin Memory Technologies (CXMT) plans to go public on Thursday with a valuation of about $85 billion, though grey market valuations suggest even higher figures. NAND flash memory maker Yangtze Memory Technologies (YMTC) also plans a near-term listing in Shanghai, with current market estimates placing its valuation at around $44 billion.