SK hynix (000660.KS) is expected to list its American Depositary Receipts (ADRs) as early as next month, and global investment banks (IBs) including Goldman Sachs and JP Morgan are now stepping up efforts to allocate underwriting volumes among themselves.
According to the IB industry Wednesday, SK hynix and its underwriting syndicate, which confidentially submitted a registration statement (Form F-1) for the ADR offering to the U.S. Securities and Exchange Commission (SEC), are intensifying discussions to allocate the underwriting share for each firm. The recent steep rise in SK hynix's stock price has driven the total ADR issuance value far above earlier expectations. The underwriting syndicate consists of Goldman Sachs, JP Morgan, Bank of America (BofA) and Citigroup Global Markets Securities.
As recently as early this year, when ADR issuance discussions began, SK hynix's share price stood at only around 700,000 won. But with the stock soaring to 2.685 million won that day, the total value of the ADRs to be issued has far exceeded earlier estimates.
SK hynix is expected to issue new shares within 2.5% of its current listed shares (17.8 million shares), in order to maintain the minimum 20% stake of its largest shareholder, SK Square. Accordingly, market observers expect SK hynix's total ADR issuance to reach more than 40 trillion won. Mirae Asset Securities, in a report issued on the 1st of this month, projected that "assuming a maximum 2.5% listing and considering the current share price and a won-dollar exchange rate in the 1,500 won range, the offering size would be about $27.7 billion (42.24 trillion won)."
Amid this situation, pre-marketing by SK hynix and the underwriting syndicate is also gaining pace. As the syndicate has both U.S. institutional networks and the capacity to handle local SEC regulations, it bears the task of leading demand generation and price formation going forward.
However, the market has cautiously raised the view that as SK hynix's corporate value rises steeply, it may not be as easy as expected for the global IBs to absorb the ADR volume all at once. Each underwriter must secure on average about 10 trillion won in demand, which is not entirely without burden even for a global IB. "It is true that SK hynix is drawing far more attention than in the past," an IB official said, "but from the perspective of the U.S. stock market as a whole, selling tens of trillions of won worth of shares in a Korean semiconductor company may not be as easy as we think."
Some assess that the absence of Morgan Stanley, a major U.S. IB, from the syndicate has increased the volume burden on the other underwriters. Some analysts say that a past grudge between Morgan Stanley's research arm and SK hynix partly influenced its exclusion from the syndicate this time. On September 15, 2024, Morgan Stanley sharply lowered its target price and investment opinion on SK hynix in a report titled "Winter looms."
Still, an ADR listing is positive in that it offers investors in the U.S. and around the world a direct investment opportunity, while also expanding the sales base to semiconductor sector funds and exchange-traded funds (ETFs). By improving trading accessibility, it is also highly likely to trigger a valuation re-rating. SK hynix would become directly comparable to global memory makers such as Micron Technology, the bellwether for the memory market.
Indeed, many experts say SK hynix will narrow the valuation gap with Micron, the U.S. memory chipmaker, on the back of its ADR listing. On a 12-month forward price-to-earnings ratio (PER) basis, SK hynix trades at 6.9 times, significantly undervalued compared to Micron's 11 times. "Memory makers have recently seen their capital expenditure-to-profit ratio decline, raising the possibility of expanded shareholder returns," said Han Dong-hee, an analyst at SK Securities. "As SK hynix's shareholder returns increase, it is expected to narrow the valuation gap with Micron on the back of the ADR listing."
