UBS tells investors to buy SK hynix ADRs, sell Korean shares

Investment bank UBS Group has advised investors to buy SK hynix's American depositary receipts (ADRs) and sell the company's Korea-listed shares, saying the newly issued ADRs are likely to trade at a premium.

Bloomberg reported Tuesday that UBS's sales and trading desk made the recommendation in a client note ahead of SK hynix's ADR listing on the Nasdaq on Friday. The bank said ADRs could be more attractive than Korean shares to hedge funds and similar investors because they are more efficient and less costly to hold and manage, and that global portfolio managers who do not include Korean-listed shares in their investment universe would also gain access through the ADRs.

"Buying the depositary receipts from day one and shorting the domestic (Korean) line is an obvious trade," UBS said in the note, adding that the ADRs were "very unlikely to trade at a discount" given the highly scalable nature of the trade and the very limited dollar exposure involved.

Demand from global retail investors who hold little exposure to Korean-listed shares was also cited as a fresh source of inflows.

"There has been some news about US brokerages providing overseas retail investors with access to Korean shares, but this is a recent development," UBS said. "Global retail investor ownership of SK hynix remains low, and the ADR will improve accessibility."

Bloomberg said investor attention has centered on whether the ADRs and Korean shares can be freely converted into each other.

According to filings with the US Securities and Exchange Commission (SEC), ADR holders can cancel their receipts and receive the equivalent number of Korean-listed shares, but converting ordinary shares back into ADRs at a later stage may require approval from Korean authorities, creating potential restrictions.

UBS said investors would watch the headroom remaining under foreign ownership limits when converting from SK hynix's domestic listing to its US secondary ADR listing in the future. "Without that limit flexibility, the lack of accessibility would likely cause the US line to trade at a clear and persistent premium," it said.

In practice, US-listed ADRs that cannot be fully and freely exchanged with their home-market shares often trade at a premium to those shares.

TSMC's ADRs listed on the New York Stock Exchange traded at an average premium of 16 percent over the company's Taiwan-listed shares this month.

yckim6452@heraldcorp.com