SK Hynix closed down 15% in Seoul on July 13, its first trading day after its American Depositary Receipts debuted in New York following a $26.5 billion offering.
The plunge in the South Korean AI memory chip maker's shares drove a 9% drop in the benchmark KOSPI which triggered a brief circuit-breaker suspension.
The company's ADRs were priced at $149 each, equivalent to a roughly 5% premium to the last closing price of Seoul stock on July 9. Each ADR represents one-tenth of a common share of SK Hynix. The ADRs closed on July 10 at $168 each.
BofA Securities, Citigroup, Goldman Sachs and JPMorgan acted as global coordinators.
Supply limits help sustain demand
Other investors were getting exposure to the SK Hynix shares via swaps but they faced sizing constraints and high financing costs, leading to pent-up demand for the ADRs.
As a result, the offering was heavily oversubscribed, generating $258 million in fees for underwriters led by Goldman Sachs, Citigroup, JPMorgan and BofA. Citi earned a slightly larger share for steering SK Hynix through the confidential filing process and it also administers the ADRs.
Investors can readily cancel ADRs and convert them into ordinary shares, but creating new ADRs from local stock is restricted for both SK Hynix and TSMC. The resulting bottleneck limits arbitrage and helps sustain the premium.
Regulatory hurdles and FX concerns
For TSMC, Taiwan regulators effectively restrict the supply of ADRs, so they are stuck at roughly 20% of the total shares outstanding. For SK Hynix, the new American shares make up less than 3% of the outstanding total; converting ordinary shares into ADRs requires a separate reporting procedure which would take time and increase costs for investors.
There's room for its ADR volumes to increase but Korean officials may also drag their heels on approving conversions because of foreign exchange worries.
The global AI boom has fuelled demand for chips made by SK Hynix and Samsung Electronics — another potential ADR candidate — and propelled the KOSPI 114% higher over the past one year. Yet the won has lost 8% against the U.S. dollar. Allowing more ADRs could result in an even bigger disconnect.
ADR debut creates a persistent premium
South Korea could, with a wave of its hand, crush the U.S. stock market premium that the world's second largest memory chip maker commands by allowing full fungibility of its ordinary shares in Seoul. But officials in the Asian country have little reason to do that quickly.
Following its $26 billion Nasdaq debut on Friday, SK Hynix's Seoul-traded shares plunged 15% on Monday. That leaves the newly listed American Depositary Receipts priced at a yawning 36% premium to the underlying shares — more than twice the bump Taiwan's TSMC enjoys on its ADRs.
The premium will shift again when U.S. markets open but both AI giants benefit from a scarcity boost. SK Hynix's ADRs gave many U.S. dedicated long-only investors their first direct route to the chipmaker.
SKHY•
