As SK hynix's (000660.KS) listing of American Depositary Receipts (ADRs) in the United States approaches, expectations are also growing that the corporate value of SK Square (402340.KS), its largest shareholder, will be re-evaluated.
If the U.S. listing expands access for global investors and eases the "Korea discount," the resulting rise in SK hynix's corporate value could have a positive impact on SK Square's stock price, analysts say. However, some caution that an ADR listing alone does not guarantee a rise in corporate value, arguing that future earnings improvements and shareholder return policies must accompany it.
According to the Financial Supervisory Service's electronic disclosure system Tuesday, SK hynix will list its ADRs on the U.S. Nasdaq market on the 10th. The issuance is worth approximately 45.5 trillion won, about 2.5% of total shares outstanding. SK Square is the largest shareholder of SK hynix, holding a 20.5% stake. For this reason, changes in SK hynix's asset value are directly linked to SK Square's corporate value.
The securities industry expects that the ADR listing will ease the undervaluation SK hynix has faced compared with global memory makers. Improved investment access from the U.S. listing and inflows of global passive funds are also cited as expected factors. In fact, SK hynix posts higher operating profit than Micron, but while Micron's 12-month forward price-to-earnings ratio (PER) is around 11 times, SK hynix remains at about 6 times.
This is why analysts say that if SK hynix's corporate value is recognized in the U.S. market, SK Square's asset value could rise along with it. Foreign ownership of SK Square approaches 50%.
"Along with the rise in SK hynix's stock price, SK Square's corporate value is also rising," said Ahn Jae-min, a researcher at NH Investment & Securities. "SK Square is continuing to review expansion into businesses that can create synergy with SK hynix within the semiconductor value chain."
If new shares are issued after the ADR listing, SK Square's stake in SK hynix will fall slightly to around 20%, but the company says there will be no major change in control. In its securities registration statement filed with the U.S. Securities and Exchange Commission (SEC), SK hynix stated that "the maximum offering size was determined in consideration of the requirement that SK Square, our largest shareholder, must hold at least 20% of our total shares outstanding under the Fair Trade Act."
The industry expects that even if additional ADRs are issued, SK Square's stake will maintain its current level. This is because the company could repeatedly raise its stake through share buybacks and cancellations before diluting it through ADR issuance. However, some view that long-term shareholder return capacity and funding are needed, as substantial resources would inevitably be required in the repeated buyback and cancellation process during additional ADR listings.
Meanwhile, both SK hynix and SK Square posted sharp declines from early trading Tuesday. As of 10:51 a.m., SK hynix was down 5.74% and SK Square down 5.52%.
