This article appeared on the 20th at 4:26 p.m. on Signal, a capital markets compass service.
The volume of American depositary receipts (ADRs) registered for LG Display and POSCO Holdings, both listed in the U.S. market, has risen sharply this year. The increase is attributed to ADR premiums and currency-hedging demand amid a strong dollar and continued stock market volatility.
According to LG Display's half-year report released on the 20th, the number of ADRs registered on the New York Stock Exchange (NYSE) stood at 62,663,706 as of the second quarter. That is up 27,471,814, or 78.1%, from 35,191,892 at the end of last year. For LG Display, two ADRs correspond to one underlying share, so the volume of deposited underlying shares also expanded to 31,331,853 from 17,595,946. The share of underlying shares backing ADRs out of total outstanding shares of 500 million rose to 6.27% from 3.52%.
POSCO Holdings' ADR count also climbed nearly 40% this year. Specifically, it rose by 3,542,296, or 38.7%, to 12,701,316 as of the second quarter from 9,159,020 at the end of last year. Because four POSCO Holdings ADRs correspond to one underlying share, the number of underlying shares backing the ADRs increased to 3,175,329 from 2,289,755. As a result, the share of underlying shares deposited against ADRs out of POSCO Holdings' total outstanding shares expanded to about 4.01% from 2.83% over the same period. Even as the company's total outstanding shares fell to 79,241,527 from 80,932,952 due to a treasury stock cancellation, the number of underlying shares backing the ADRs rose instead.
Unlike a new share issuance, an increase in ADR volume works by depositing the underlying domestic shares with a custodian and issuing corresponding ADRs in the U.S. An increase in ADRs does not itself mean an increase in capital, but because underlying shares are deposited, that volume is excluded from shares traded directly on the domestic market for as long as the ADRs exist. Industry consensus holds that the practical impact is minimal, as existing investors typically use shares they already hold for various purposes.
Demand to convert underlying shares into ADRs appears to have grown for LG Display and POSCO Holdings amid the strong dollar and stock market volatility. An "ADR premium" — in which ADRs trade at a higher price than the underlying shares — is also likely to have played a role. "If an ADR premium exists, conversions may have been made for arbitrage purposes," said Seok Byung-hoon, a professor at Ewha Womans University.
For POSCO Holdings, the fact that its ADRs traded higher than its underlying shares was a key factor. As of the June 30 closing price, POSCO Holdings shares stood at 317,000 won, while the ADR (PKX) was $51.38, which converts to 318,432 won based on a won-dollar exchange rate of 1,549.4 won. According to POSCO Holdings' half-year report, the ADR's average share price in June was 371,554 won, higher than that of the underlying shares at 361,738 won.
For LG Display, overseas institutional investors are known to have converted underlying shares into ADRs for currency-hedging purposes. The ADR (LPL) also traded higher than the underlying shares. As of the June 30 closing price, LG Display closed at 11,530 won, below the 12,054 won reached when the ADR (LPL) is converted to underlying shares.
