Investment bank UBS Group has recommended a 'buy' on SK hynix's (000660.KS) American depositary receipts (ADRs) and a 'sell' on its Korean-listed shares. The call reflects UBS's judgment that the ADRs, set to list on the Nasdaq on the 10th, are likely to trade at a premium to the Korean-listed shares.
"Buying the depositary receipts from day one and shorting the local (Korean) line is an obvious choice," UBS's sales and trading desk said in a client note, Bloomberg reported on the 8th. "With the dollar amount exposed to risk very limited, scalability is excellent, and the likelihood of trading at a discount is very low."
Based on the disclosed conversion ratio, one SK hynix common share corresponds to 10 ADRs. UBS said the ADRs would be more efficient to hold and manage, and their lower price would make them an attractive investment vehicle for institutional investors such as hedge funds. UBS also said new capital inflows can be expected, as global portfolio managers who had not previously included Korean stocks in their investment universe will now be able to invest in SK hynix through the ADRs. The still-low share of SK hynix held by overseas retail investors is also cited as a factor that could expand ADR demand.
Investor attention is also focused on whether the Korean shares and ADRs can be converted into each other. According to filings submitted to the U.S. Securities and Exchange Commission (SEC), ADR holders can cancel their receipts and receive Korean-listed shares. However, converting common shares into ADRs requires approval from Korean authorities and other steps, which could pose constraints.
"Investors will focus on the available headroom under the foreign ownership limit permitted when converting from SK hynix's domestic listing to the U.S. secondary ADR listing in the future," UBS said. "Without such flexibility in the limit, the U.S. line is likely to trade at a distinct and persistent premium due to a lack of accessibility."
In fact, ADRs that are not fully interchangeable often trade at a premium to their home-market listed shares. TSMC's ADRs listed on the New York Stock Exchange (NYSE) also traded at an average 16% premium to the Taiwan-listed shares this month.
