"Why Are the Same Shares Priced Differently?" Will SK hynix Also See a 'U.S. Listing Premium'? [SK hynix ADR Boost]

Yonhap News Agency

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"SK hynix could also benefit from a (U.S. listing) premium similar to TSMC, given its significance in memory and artificial intelligence (AI)-related technologies," said Professor Chen Yaotung of Ming Chuan University in Taiwan (pictured) in a recent written interview with The Asia Business Daily. When asked whether SK hynix could enjoy a share price premium similar to TSMC if it is listed on the U.S. stock market, he responded accordingly. However, he added, "The magnitude and persistence of the premium will depend on investor perception, liquidity conditions, and the level of segmentation between the Korean and U.S. markets."

Professor Chen Yaotung of Ming Chuan University, Taiwan. Author of the paper "Empirical Analysis of the Persistent Premium of TSMC American Depositary Receipts (ADRs) Compared to Common Shares Listed on the Taiwan Stock Exchange."

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Professor Chen is the lead author of the paper "An Empirical Analysis of the Persistent Premium of TSMC American Depositary Receipts (ADRs) Compared to Common Shares Listed on the Taiwan Stock Exchange." As indicated by the title, TSMC's ADRs have maintained a premium of around 2% over the company's Taiwan-listed shares. Over the past 24 years (2000-2023), the average listing premium of TSMC's ADRs was about 1.8-3.3%. For the most recent three-year period (2020-2023), the average was 2.58%. This paper was published in October last year in Applied Economics Letters.

In a typical arbitrage market, the prices of shares listed in both countries should be equal. In arbitrage markets, the same asset is traded simultaneously, providing investment opportunities based on price differences. Therefore, when a price gap between the U.S. and Taiwanese markets arises, investors swap shares accordingly. Expensive shares are sold, driving their price down, while cheaper shares are bought, pushing their price up-eventually equalizing share prices between the two markets.

However, in the case of TSMC, its U.S.-listed shares have consistently traded at higher prices than those in its home market. This phenomenon, which also intrigued Professor Chen as a "Taiwanese retail investor," inspired him to pursue this research. He explained, "While I had the motivation from an investor's perspective, it was the persistent and somewhat inexplicable nature of the phenomenon that led me to this research." He added, "Specifically, I observed that TSMC's ADRs continued to trade at a premium compared to its home shares, even after accounting for exchange rates."

The reasons for ADRs trading at higher prices than home shares are complex. The paper attributes these results to factors such as ample liquidity, investor composition, and information accessibility. In particular, it highlights the possibility that the U.S. market plays a more significant role in 'price discovery.'

Professor Chen stated, "It is a general trend in global financial markets that ADRs have a greater impact on price discovery than home shares," adding, "The high liquidity and active participation of institutional investors in the U.S. market play critical roles in this price discovery process." This means that trading activity is likely to be more robust in the U.S. market, where larger pools of capital are involved.

TSMC Factory in Kaohsiung, Taiwan. Photo by Reuters Yonhap News

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He continued, "Although both markets influence TSMC, the ADRs exert a greater influence during periods of global information flow or heightened uncertainty."

Regarding concerns that the 'U.S. market premium may affect the home share price,' he said, "In an ideal, frictionless environment, arbitrage would eliminate price differences between markets. However, in reality, trading costs, capital constraints, and regulatory frictions exist, so perfect arbitrage is not achievable."

Translating this to SK hynix, it suggests that if an ADR premium is maintained, the value of SK hynix shares listed on the Korean stock market is also likely to remain robust. This contrasts with concerns that ADR issuance could dilute the value of Korean shares. He pointed out, "It is more appropriate to interpret the ADR premium as a reflection of differences in investor bases and market environments, rather than a 'loss' for the home market."

On the impact of geopolitical risks-which are unavoidable for Asian companies including TSMC-on ADRs, Professor Chen noted that it remains a critical factor. He said, "Markets may sometimes appear indifferent, but geopolitical risks have the characteristic of rapidly repricing assets when an event occurs. This is especially true for companies like TSMC, which play a strategically significant role in the global supply chain."

However, Professor Chen emphasized that while TSMC’s ADR listing acted as a 'catalyst' for TSMC’s growth, it was not the sole reason for its success. For instance, TSMC's dominant position in advanced semiconductor manufacturing, strong interest from global investors, and its crucial role in the AI and high-performance computing supply chains drove sustained demand in the U.S. market.

He stated, "The ADR listing played an important role as a catalyst, but it was not the only factor in TSMC’s success. It contributed to improving international capital accessibility, expanding the investor base, and enhancing corporate recognition. While these factors certainly aided growth, TSMC’s long-term success ultimately depended on its technological capabilities and operational excellence."

For Korean listed companies, a reverse premium often occurs. For example, KB Financial Group's ADR closed at $106.97 on April 8 (local time), up 24.1% from the start of the year (January 2). However, during the same period, its home shares in Korea rose by 26.5% as of April 8, meaning the Korean shares outperformed the U.S. ADRs in terms of returns.

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