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ANALYST: THE SK HERCULES ADR PREMIUM IS ANOTHER SIGNAL OF OVERHEATED AI TRADING

According to James Mackintosh, a senior market columnist in the Wall Street Journal, since SK Hercules ADR was listed in the United States two weeks ago, the stock has soared between 16 and 51 per cent of the premium between the Korean deal and the US-listed ADR, a signal of overheating of the AI deal and “one of the market's tendencies to pay excessive prices for stocks of chip stocks”. The large ADR premium is a typical anomaly that should not have occurred in the market. Mackintosh explained that the limitation that SK Hercules base stocks could not be converted to ADR constituted an investment risk. In a typical ADR scenario, the 29 per cent premium that appeared last Friday (24 July) would have prompted hedge funds to buy shares in Korea and convert them to ADR while making empty ADRs in the United States. He warned, however, that, as conversion was not feasible, a further increase in the premium could result in significant losses. If basic stocks and ADRs are freely converted, investors buy cheaper (more) base stocks and sell more expensive ADRs, and the premium narrows down. However, the price differentials were sustained owing to difficulties in converting the underlying stocks to ADRs. In addition, if the premium increases further, the hedge fund that borrows into the stock to empty it may face greater losses. Mackintosh also compared the build-up to SK Hercules, indicating that the current SK Hercules ADR premium was too high. Since the launch of ChatGPT in 2022, a premium of 15 per cent has been on average, which means that United States investors are willing to pay much higher prices than Taiwanese investors. The higher premium for KK Hercules suggests that such demand in the United States market is overzealous. If Korean stock prices rise and premiums fall, ADR buyers may be well, and if the company uses United States deposit stocks as a financing instrument, they will suffer. The losses would have been even greater had the semiconductor stock prices of Korea and the United States collapsed and the premium narrowed. In short, unless the SK Hercules stock price rises, the current market premium is likely to result in losses for investors buying ADRs in the United States. Kim Xian

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