SK hynix ADR buying frenzy cools as premium debate divides Wall Street and Seoul

Buying interest in SK hynix's American depositary receipts has cooled after nearly 1 trillion won ($682 million) poured into the newly listed shares, and views on the ADR's steep premium are sharply divided. Wall Street has warned the premium signals overheated AI investment, while domestic brokerages lean toward a gradual revaluation of the underlying shares. Wednesday's launch of mutual conversion between the ADR and the underlying stock is expected to serve as the first real test of both views.

Domestic investors net-bought $675.55 million worth of SK hynix ADRs from July 10, when the shares debuted on NASDAQ, through July 24, making the ADR the top-accumulated net purchase among all foreign stocks over that period, according to the Korea Securities Depository.

The explosive buying that marked the opening days has since moderated, however. Domestic investors net-bought $173.41 million on July 10, the first trading day, and $344.84 million on July 13, meaning roughly 71 percent of total net purchases over the period were concentrated in just two days. The ADR continued to rank among the top five most net-purchased foreign stocks on most subsequent days, but daily volumes shrank to tens of millions of dollars. On July 20, investors turned net sellers for the day. They returned as net buyers on July 21, purchasing $61.88 million — enough to reclaim the top spot among daily net purchases of US stocks — but that figure represented only about 36 percent of the first trading day's volume and about 18 percent of July 13's.

The price performance of the ADR and the underlying shares has also diverged since the listing. From July 10 through July 24, the underlying SK hynix shares fell 19.3 percent, from 2.18 million won to 1.759 million won, while the ADR declined only 8.0 percent, from $168.01 to $154.57.

The ADR still trades at a premium to the underlying shares, however, making a straightforward comparison of price declines an incomplete measure of investment performance. How the premium adjusts going forward is a key variable that will determine actual returns for ADR investors.

On Wall Street, some analysts view the elevated premium as a sign of overheated AI investment. The Wall Street Journal, in its "Streetwise" market analysis column on Friday (local time), highlighted the SK hynix ADR's steep premium, writing that "the same stock trading at very different prices in different markets is something that shouldn't happen."

James Mackintosh, a senior markets columnist at the Wall Street Journal, noted that the SK hynix ADR had traded at a 16 to 51 percent premium to the underlying shares since its listing and called the gap "yet another sign that enthusiasm for AI chip investment has become overheated." He added that while the premium could persist given structural barriers to arbitrage between the ADR and the underlying shares, ADR investors could end up at a disadvantage relative to holders of the underlying stock if the price gap narrows.

Domestic brokerages, by contrast, lean toward a gradual normalization of the premium rather than a sudden collapse. Even after mutual conversion begins, the pace at which the price gap closes will depend largely on the volume of new ADR supply. Analysts also see longer-term potential for the gap to narrow through a revaluation of the underlying shares.

Lee Jeong-bin, a researcher at Shinhan Investment, said the SK hynix ADR launched at a premium of about 3 percent immediately after listing, then surged to as high as 52 percent within a short period, driven by strong demand from US investors seeking easy access and limited available supply. "The premium has since come down to around 33.2 percent, so some of the initial excess has unwound, but it remains historically elevated," he said.

Lee said the start of the mutual conversion process alone is unlikely to compress the premium immediately. "The actual pace of price-gap adjustment will depend on the volume of new ADR issuance by Citibank and market supply-demand dynamics," he said. He described July 29 as "not the point at which premium normalization is complete, but the first inflection point at which we can gauge how the market actually responds to new ADR supply."

Looking further ahead, Lee highlighted the potential for a revaluation of the underlying shares. "TSMC's ADR has maintained an average premium of 12.6 percent over the past five years, so a complete disappearance of the premium is less likely than a sustained level," he said. Analyzing seven comparable cases — four overseas and three domestic — he found that roughly half of the post-peak premium compression came through a rise in the underlying shares rather than a decline in the ADR. "SK hynix is currently trading at a historically low forward price-to-earnings ratio of 4.7 times on a 12-month basis," he added. "It is worth watching for the possibility that prices converge through an upward move in the underlying shares."