'46.8% Gap' SK hynix Shares Trade at a Deep Discount Only in Korea... Why Has the Gap Widened? [Weekend Money]

Korea-U.S. Price Gap Widens from 25.6% to 46.8% Since Listing

"Symbol of the Korea Discount"

Calls to Expand Ordinary Share-to-ADR Conversion Limit and Simplify Procedures

Overseas Stocks with Free Conversion Have Price Gaps of Around 2%

SK hynix shares are trading at a deep discount in Korea alone. The price gap between SK hynix ADRs, which were listed on the Nasdaq in the U.S. last July, and the company’s ordinary shares in Korea has widened to 46.8% (as of October 21).

Kim Soo-hyun, head of the research center at DS Investment & Securities, said in a recently published report, “The gap is not narrowing because there is no way to convert ordinary shares into ADRs, and it will be difficult to leave this situation unaddressed indefinitely.”

The two securities have the same underlying assets and dividends. “Only the voting rights attached to ADRs are exercised through a depositary institution; in substance, they are the same thing,” Kim explained. However, the average monthly price gap has widened from 25.6% in July to 46.8% now. With the government pledging to address the Korea discount, analysts say the gap could appear to foreign investors as a symbol of how undervalued the Korean market is.

The Same Underlying Assets and Dividends... Yet the Gap Has Widened Since Listing

An ADR (American Depositary Receipt) is a certificate that allows shares of a foreign company, held by a depositary institution in its home country, to be traded in the U.S. market. For SK hynix, 10 ADRs represent one ordinary share.

The gap has widened because of supply and demand. ADRs attracted large amounts of capital that would not otherwise have flowed into the Korean stock market, including through inclusion in semiconductor indexes that hold only U.S.-listed stocks. Meanwhile, selling continued in the Korean ordinary shares. Kim suggested that the unwinding and resumption of short-selling positions around the ADR subscription may also have increased selling of the ordinary shares.

Normally, such price gaps do not last long. Investors can buy the cheaper ordinary shares, convert them into ADRs, and sell them for a profit, narrowing the gap in the process. But the limit on converting ordinary shares into ADRs - 17.79 million shares, or 2.4% of shares outstanding - has already been filled by the public offering. ADRs can be freely converted into ordinary shares, but the reverse conversion is blocked. A recent share buyback worth 40 trillion won also failed to narrow the gap.

International examples show that the gap depends on whether conversion is possible. Toyota and Alibaba allow ordinary shares and ADRs to be converted in both directions, keeping the gap between 0% and 2%. KB Financial Group, Shinhan Financial Group, POSCO Holdings, and Korea Electric Power Corporation have ADRs accounting for 2% to 6% of their shares, yet their average gaps over the past year have remained between 0.2% and 0.6%. SK hynix has a similar ADR ratio of 2.4%, but its conversion limit has been fully used, and its gap has reached 37% to 47%.

Where Conversion Is Allowed, the Gap Is Around 2%... “Expanding the Limit and Simplifying Procedures Are Practical Options”

Trends in SK hynix’s ordinary share and ADR prices and their price gap. DS Investment & Securities Research Center

ADRs registered by SK hynix in the U.S. account for about 24% of its shares outstanding, but the limit the company has approved for converting ordinary shares into ADRs is 2.4%. Under Korean law, conversion requires the issuing company’s consent, and the company sets the limit. Kim said a practical approach would be to raise the limit gradually and simplify the process so that investors can complete the required filing in a single step within the set limit.

Kim also said that expanding the conversion limit would not affect SK Square’s ownership stake. The decision to set the size of the new-share ADR issuance at around 2.5% took into account SK Square’s need to maintain an ownership stake of at least 20%. However, converting already-issued ordinary shares into ADRs would not increase the total number of shares, leaving its ownership stake unchanged.

Voting rights remain a factor. ADR investors exercise their voting rights through a depositary institution, and those rights are not exercised if no instructions are given. As the proportion of ADRs grows, the composition of voting rights actually exercised at shareholders’ meetings could change.

Kim said, “If the company considers expanding conversion, it is expected to weigh the advantages and disadvantages of this issue, including whether the composition of voting rights would change.”

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