UBS: Buy SK Hynix ADRs in the US, Sell Korean Shares

Global investment bank UBS has advised its clients to adopt a specific investment strategy for South Korean chipmaker SK Hynix: buy its American Depositary Receipts (ADRs) and simultaneously sell its ordinary shares traded on the Korean stock market. This recommendation comes ahead of the ADRs' listing on Nasdaq on July 10.

UBS anticipates that the SK Hynix ADRs will likely trade at a higher price than the ordinary shares. The bank's analysis suggests that the ADRs will be more accessible to a broader range of US investors, including hedge funds, institutional investors, and individual traders who might not typically invest in the Korean stock market. This potential influx of new capital could create a premium for the ADRs.

The strategy proposed by UBS is rooted in arbitrage, a trading method that seeks to profit from price discrepancies between related assets. The bank stated that "buying ADRs and shorting domestic stocks is a very obvious choice." This approach does not necessarily reflect a negative outlook on SK Hynix's overall corporate value but rather aims to capitalize on market inefficiencies and differing access points.

ADRs allow US investors to trade shares of foreign companies on American exchanges using dollars, without needing to open accounts on overseas markets. While the underlying asset is the same, factors like trading venue, currency, supply and demand dynamics, and conversion conditions can lead to price differences between ADRs and their underlying ordinary shares. The ease of converting Korean shares to ADRs will be a key factor in how long any price premium might be sustained.

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Buying ADRs and shorting domestic stocks is a very obvious choice.