Seohak Ants Flock to SK hynix ADRs Despite Higher Taxes—Why?

Net Buying Exceeds 1 Trillion Won Since Nasdaq Listing on July 10

"Buying Fueled by Premium and Accessibility for Small Investors"

Retail investors in Korea, known as "Seohak Ants," are flocking to SK hynix ADRs listed on the U.S. Nasdaq. This buying trend is attributed to the accessibility of investing smaller amounts compared to the domestic underlying stock, as well as expectations that the "ADR premium" will be maintained.

According to the Korea Securities Depository’s SAFE system on July 28, Korean investors purchased a net $155.16 million (about 226.4 billion won) of SK hynix ADRs during the week from July 18 to 24. This was the largest net purchase of any U.S.-listed stock by Korean investors during that period. Expanding the window to include purchases since the ADR’s listing on July 10, they have bought a cumulative $675.54 million (about 991.2 billion won) worth of SK hynix ADRs.

SK hynix ADRs are currently trading at a premium to the domestic underlying stock on the U.S. market. On July 24, SK hynix ADR closed at $154.57 per share (about 225,734 won). Applying the conversion ratio of 10 ADRs to 1 underlying share and converting to Korean won, this equals 2,257,340 won per underlying share. This means the ADRs are trading at a 28.3% premium compared to the domestic stock (1,759,000 won).

However, ADR trading is less advantageous for individual investors from a tax perspective. Gains from trading SK hynix stocks listed domestically are exempt from capital gains tax. By contrast, since ADRs are considered foreign stocks, any annual profit exceeding 2.5 million won is subject to a 22% capital gains tax. There is also foreign exchange risk to consider.

Analysts say that individual investors are prioritizing the potential premium and accessibility of SK hynix ADRs over tax concerns. An official from a brokerage firm explained, "There is a possibility that passive funds, such as those tied to ADR-based ETFs, will help keep the premium elevated. Since TSMC’s ADR premium remained high, there is also an expectation for similar behavior here. Additionally, since the cost of buying one ADR is about one-tenth of the underlying share, investors can participate with smaller amounts."

Although the mutual conversion between SK hynix’s domestic stock and ADRs will begin on July 29, the market expects that the premium will not disappear immediately. Lee Jungbin, a researcher at Shinhan Securities, commented, "There are procedural and administrative frictions in the conversion process, so an immediate narrowing of the premium is unlikely. While there is room for additional issuance under listing standards, the actual supply of ADRs depends on the depository institution’s operating procedures and approval conditions. July 29 is considered more of a first turning point for gauging the actual supply response rather than a definite normalization of the premium."

Meanwhile, concerns are mounting overseas that the SK hynix ADR premium has become excessive. On July 26 (local time), James Mackintosh, senior markets columnist at The Wall Street Journal, wrote in a column that, “The extraordinarily large ADR premium over the underlying SK hynix stock in Korea is something that should not happen in the markets.” He warned, “If the gap closes as the Korean stock catches up, ADR buyers may be fine. However, if the company uses the U.S. listing as a ‘piggy bank’ to raise money, they could be hit hard; and if semiconductor stocks crash in both Korea and the U.S., erasing the premium, the losses could be even greater.”

This content was produced with the assistance of AI translation services.