Geopolitical shock exposes SK Hynix leverage after hot ADR debut

By Jules Rimmer

Shares in SK Hynix hit 15% air pocket after successful launch of ADRs on the Nasdaq in the prior session

SK Hynix shares slumped in Seoul trade after a successful U.S. debut on Friday.

Just one trading session after a highly successful U.S. debut for its depositary receipts, local shares in South Korean chip maker SK Hynix plummeted 15% on the domestic exchange in Seoul.

Worldwide stock-market volatility, triggered by the breakout of renewed hostilities in the Strait of Hormuz, was the main reason for selloff, but the losses were exacerbated by the huge amount of leveraged exposure to SK Hynix (KR:000660), a stock whose sixfold increase over the last 12 months has attracted huge speculative interest from Korea's army of retail investors, known as "ants."

For example, an exchange-traded fund HK:7709 listed in Hong Kong offering two times leverage on the share price of SK Hynix dropped by a third on Monday. Several U.S. firms are planning to offer similar leveraged products this week after SK Hynix depository receipts (SKHY) made a highly successful debut on Nasdaq Friday.

This is not just profit taking but a positioning problem colliding with a macro shock, according to Patrick Munnelly, partner at Tickmill Group. "Semiconductors remain the highest-beta expression of the AI trade, but they are also the first place investors cut when oil spikes, real yields rise and geopolitical risk clouds the discount-rate outlook," said Munnelly.

After listing at $149, the ADRs closed 13% higher at $170 on Friday with the $26.5 billion share offering, the second-largest on record, more than seven times oversubscribed. Many investors received allocations far lower than their demand with the top 25 accounts reportedly accounting for 65% of the deal.

South Korea's benchmark Kospi index KR:180721 declined 9% on the day to close at 6,806, and its recent correction, from an all-time high recorded as recently as the third week of June, has now been extended to 27%.

During the session, selling was intense enough to warrant the brief halting of trade.

The domestic listing of SK Hynix closed at 1.85 million won, which is the equivalent of around $122.70 in terms of the ADR. That's a massive 28% discount to where the Nasdaq-listed ADRs closed Friday. However, the Korean shares cannot be converted into ADRs, preventing the use of arbitrage to exploit such price discrepancies. A dislocation in pricing, then, can and probably will persist.

There are several examples in the past of U.S.-listed ADRs commanding a significant premium over local shares for extended periods, such as Russia's Gazprom, India's Infosys (INFY) and the Argentinian YPF (YPF).

At such a discount, however, some hedge funds may seek to short the SK Hynix ADR while going long the ordinary shares and hoping the spread between the two contracts. In premarket trading Monday morning, SK Hynix ADRS were 9.3% lower at $152.39. They were down just less than 8% at the opening bell.

Sentiment toward SK Hynix and domestic peer Samsung Electronics (KR:005930) may take their cue this week from second-quarter results posted by Taiwan Semiconductor Manufacturing Co. (TW:2330) on Thursday.

Interestingly, while Asia's other most significant AI play, Kioxia Holdings (JP:285A), collapsed almost 13% in Tokyo, the performance of TSMC (TSM) in anticipation of its numbers was very reassuring. Its stock closed 1% higher in Taipei.

-Jules Rimmer

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07-13-26 0934ET