(June 25): SK Hynix Inc shares surged after the memory chipmaker unveiled its plan for a US$29 billion ($37.6 billion) US listing, a move that analysts viewed as boosting valuations through capacity expansion and greater foreign investor access.
The stock jumped nearly 12% in early Thursday trading, before trimming its advance to around 10%. Samsung Electronics Co rallied after memory chip rival Micron Technology Inc posted quarterly sales forecast that crushed Wall Street estimates. The two chip heavyweight’s moves helped drive the Kospi Index up by 6%.
SK Hynix is seeking 45.45 trillion won in a US listing after its Seoul-traded stock climbed more than 800% in the past 12 months, lifting the company’s market value above US$1 trillion. The company expects the American depositary receipts (ADRs) to begin trading on July 10 and intends to use the proceeds for the building of additional capacity and buying extreme ultraviolet lithography machines.
The planned US debut has been a much-awaited event for global money managers, who longed for easier, direct access to the leading supplier of high-bandwidth memory. Positioned at the heart of the artificial intelligence (AI) supply chain, its coveted product drove a rally in its stock and triggered massive inflows into leveraged exchange-traded funds (ETFs) listed at home and overseas tracking its performance.
“Going forward, the market’s focus will shift from demand to execution, particularly SK Hynix’s ability to expand HBM capacity and deliver on aggressive production targets in the US,” said Jung In Yun, the chief executive officer of Fibonacci Asset Management Global. There might be some arbitrage activity between ADRs and ordinary shares, but “this should be viewed as a positive development that enhances liquidity and price discovery, rather than as a source of shareholder dilution”, he said.
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Shares of SK Inc, the holding company of SK Group, surged as much as 20% on Thursday in Seoul. SK Square Co, seen as SK Hynix proxy, rose more than 11% before paring its advance.
At the proposed size, SK Hynix’s ADR sale would be among the top three first-time share sales ever, depending on the exchange rate. It would rival Saudi Aramco’s US$29.4 billion 2019 initial public offering, according to data compiled by Bloomberg.
SK Hynix’s book-building process starts July 6 in the US, with ADR offering prices set July 9 before trading kicks off the following day in New York.
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Investors are drawing comparison to chip giant Taiwan Semiconductor Manufacturing Co (TSMC), which listed its ADRs in 1997. The Korean chipmaker’s US debut would give it access to a fresh pool of investors and could help it narrow a gap in its valuation compared with its competitors. SK Hynix trades at 7.5 times forward earnings in Seoul and Samsung at 6.7 times, a discount to 21 for TSMC and 9.5 for Micron.
“A liquid US listing could help reposition SK Hynix alongside global semiconductor leaders such as TSMC, whose ADR has attracted deep institutional ownership and commands a valuation premium,” said Aadil Ebrahim, the group head of equities at Klay Group. “Greater visibility, improved accessibility, and stronger institutional participation could help narrow the valuation gap.”
Shares fungibility
The ADR-listing plan has drawn strong interest from relative-value arbitrage traders, who seek to profit from pricing gaps between correlated securities. Depending on the fungibility of shares — meaning how easily the ADRs and Korean ordinary shares can be swapped for one another — it opens the door to varied trading strategies.
“The ADR/Korean ordinary shares fungibility is the key swing factor for how much of the rerating accrues to the ADR versus the ordinary shares, and it remains unconfirmed,” said Roy Lim, an equity sales trader at NH Investment & Securities in Seoul.
If the shares are only partly fungible, similar to TSMC’ US and Taipei listings, then any valuation premium for SK Hynix’s US shares over its local listing may persist, Lim added. If there is two-way fungibility, as the language in the Korean securities filing suggests, their valuations would likely converge, he said.
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Under partial fungibility, an ADR’s valuation premium can skyrocket and persist during global tech frenzies, as history shows. TSMC’s ADR premium surged to over 100% over its Taipei listing during the dot-com bubble in the early 2000s.
Leveraged ETFs
The ADR listing is unlikely to ease the sway that leveraged ETFs hold over SK Hynix shares in Korea, market watchers say. The ballooning size of these single-stock vehicles and their role in volatility in the Korean stock market, the front line of this year’s AI trade, has drawn intense scrutiny.
“The new ADRs could be added to indices, which will take up some of the new float,” said Travis Lundy, an independent special situations analyst who publishes on Smartkarma. “But at the same time, the leveraged ETFs use the Korean ticker as the underlying, which means that’s where the leveraged effects are still going to be felt.”
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