Investment bank UBS Group has advised investors to buy SK hynix's (000660.KS) American depositary receipts (ADRs) and sell its Korea-listed shares. The recommendation is based on the view that the newly issued ADRs are likely to trade at a premium.
Meanwhile, foreign media also reported that ahead of SK hynix's ADR listing Wednesday, the subscription rate exceeded the offering size several times over.
"Focus Turns to Convertibility Between SK hynix Korean Shares and ADRs"
According to Bloomberg, the UBS sales and trading desk stated as much in a note to clients Friday. The reasoning is that ADRs are more efficient and cheaper in terms of holding and management, making them potentially more attractive than Korean shares to hedge funds and others, and that global portfolio managers who do not include Korea-listed stocks in their investment universe will also be able to buy them.
In the note, UBS said, "Buying the depositary receipts from day one and shorting the domestic (Korean) line is such an obvious choice," adding, "Given that the dollar exposure to risk is very limited, its scalability is excellent, so the likelihood of trading at a discount is very low." Demand from global retail investors, who hold a low proportion of Korea-listed shares, is also cited as a factor for new inflows. UBS said, "There have been some reports that U.S. brokerages provide overseas retail investors with access to Korean stocks, but this is a recent development," forecasting that "the proportion of SK hynix held by global retail investors is still low, and the ADRs will improve accessibility."
Bloomberg reported that investors' interest is focused on whether Korean shares and ADRs can be converted into one another. According to filings submitted to the U.S. Securities and Exchange Commission (SEC), ADR holders can cancel them and receive the corresponding Korea-listed shares, but there may be constraints in later converting common shares into ADRs, as this may require approval from Korean authorities.
Regarding this, UBS said, "Investors will pay attention to the headroom in the permitted foreign ownership limit when converting from SK hynix's domestic listing to the U.S. secondary ADR listing going forward," pointing out that "without such flexibility in the limit, the U.S. line is likely to trade at a distinct and sustained premium due to a lack of accessibility." In fact, U.S.-listed ADRs that cannot be fully exchanged often trade at a premium to home-listed shares. For example, the ADRs of Taiwan's TSMC listed on the New York Stock Exchange (NYSE) also traded at an average premium of 16% this month compared with Taiwan-listed shares.
"1,000 Institutional Investors Participate in ADR Marketing Meeting"
Bloomberg also reported the same day, citing a person familiar with the matter, that the pre-book demand for SK hynix ADRs exceeded the listing size of $28 billion by multiple times. This person told Bloomberg that about 1,000 institutional investors participated in a marketing meeting held by SK hynix management on the 6th of this month, saying, "Funds and technology-focused investors from around the world are flocking in." Three large investment firms — Baillie Gifford, Coatue Management, and Situational Awareness Partners — also expressed their intent to purchase up to $7 billion worth of ADRs in this first ADR offering.
SK hynix began sales marketing for the ADRs on the 6th of this month. The offering price for SK hynix ADRs is expected to be determined around the afternoon of the 9th, one day before the listing.
