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SINGAPORE: Since last year, local investors looking to diversify into businesses listed on some overseas stock markets have been able to trade a type of investment product known as Singapore Depository Receipts (SDRs). The first three SDRs made their debut on the Singapore Exchange (SGX) in May 2023. They are tied to blue-chip stocks from Thailand, such as airport operator Airports of Thailand, allowing those keen to dip their toes into other Southeast Asian markets to do so directly through the SGX.
More were added this year, with another five Thai-listed firms in May followed by five Hong Kong-listed firms in October. The latter include Chinese tech giants Alibaba and Tencent, as well as Chinese electric carmaker BYD. SDRs can be traded easily like any SGX-listed stock; some even come with dividends paid out in Singapore dollars.
But they are not to be confused with owning the actual stocks of these overseas-listed companies. And investors here have long had access to some other foreign businesses whose shares are listed directly on the SGX such as Thai Beverage and Hong Kong-headquartered Hongkong Land. Here’s how SDRs work and what local investors need to consider before investing in them.
WHAT ARE SINGAPORE DEPOSITORY RECEIPTS? Depository receipts are a type of investment product that represents an interest in a stock or security that is listed on an overseas exchange, said Mr Gerald Wong, the founder of investment advisory platform Beansprout. They are not new. American Depository Receipts (ADRs) are “widely traded” by US investors to gain exposure to non-US stocks, said Ms Carmen Lee, OCBC’s investment research head.
ADRs are traded on US stock markets just like domestic stocks, and are typically denominated in US dollars. The SDRs listed on the SGX are priced in Singapore dollars. They can be bought and sold in the same way as Singapore shares through existing brokers during local trading hours, with transactions reflected in an investor’s Central Depository account.
This means investors do not have to sign up for new brokerage accounts to trade in overseas markets and navigate the complexities of different market trading rules. Again, SDRs are not actual shares. Rather, they are investment products issued by a financial institution, otherwise known as an SDR issuer, and are backed by actual shares of the underlying company, said Mr Wong.
“What happens is that the SDR issuer will be buying the underlying security and depositing with a custodian in the foreign company’s home country. The issuer will then issue the SDR, and facilitate any conversion between the SDR and the underlying security,” he explained. An SDR issuance is done on an unsponsored basis, meaning that the issuer does not have a formal agreement with the overseas-listed company.
However, Ms Lee reckoned that the risk of an issuer filing for closure is “low” given how most of these issuers are typically well-established financial institutions. Currently, all the SDRs trading on SGX are issued by local brokerage Phillip Securities. Each SDR is represented by a specific number of the underlying overseas-listed security.
This number can vary depending on how the SDR issuance is structured. For example, if an SDR is issued on a one-to-one basis, this means that one SDR represents one share of the foreign-listed company. This is the case for most of the SDRs linked to the Thai firms and Hong Kong-listed Bank of China.
But in other cases, the ratio may be different. For example, the SDR for Hong Kong-listed BYD is issued on a 10-to-one ratio, meaning that 10 SDRs on the SGX are equivalent to one BYD share in Hong Kong. As the SDRs are linked to actual stocks held with a custodian, investors are entitled to dividends paid out by the foreign firm, as well as any corporate action such as a bonus share issue.
That said, SDR holders do not have the same voting rights as actual shareholders. Voting rights refer to when shareholders get to vote on motions put forward at an annual general meeting, for example. WHAT ARE THE BENEFITS? In general, analysts said the SDRs have made it more convenient for investors in Singapore to gain exposure to overseas stocks.
This is especially the case for Thai SDRs, given how there are fewer platforms that offer access to trading in Thai stocks, said Mr Wong. The costs are also lower, with investments done in Sing dollars and through local brokerages which means saving on overseas trading fees and foreign exchange losses, Ms Lee said. In the case of the Hong Kong SDRs, the biggest differentiating factor is giving investors “increased accessibility to Hong Kong companies with a fraction of the capital needed”, said Mr Amir Hamzah Abdul Razak, director of investment advisory at iFAST Global Markets.
For instance, given BYD’s trading price of HK$258.2 as of Jan 2, an investor buying the actual shares would have to put in around S$22,605 (US$16,600) for the minimum board lot size of 500 shares. But an investor would need to fork out only about S$455 as the minimum investment in the BYD SDR, which trades in board lots of 100 units.
This is about 2 per cent of what is originally needed to invest in the Hong Kong stock. “While it wouldn't have been difficult for an investor in the past to buy into Hong Kong shares, what this has done is to effectively bring down the minimum investment cost so that investors can access some of these companies in a bite-sized manner,” said Mr Wong. WHAT DO INVESTORS NEED TO TAKE NOTE OF? As with all investments, investors need to consider their risk appetite, investment preferences and objectives, as well as do their own research to understand the companies they are investing in.
For example, the Thai SDRs represent a wider range of industries, ranging from tourism, financial, oil and gas to consumer goods. Together, they make up more than 40 per cent of the benchmark SET50 Index, which tracks the price movements of the top 50 stocks listed on the Thai market. But compared with other markets, it is one that most local investors are less familiar with, said Mr Amir.
On the other hand, the Hong Kong SDR offerings comprise the emerging technology and electric vehicle segments, as well as the traditional financial sector. While the Hong Kong market is not one that is unfamiliar to local investors, there are geographical risks that may need to be considered. For example, the threat of hefty tariffs by incoming US President Donald Trump and how they may hit China-related stocks is one such risk, said Mr Sunny Soh, the lead technical analyst for capital markets at the Securities Investors Association (Singapore).
Tariffs are basically import taxes applied to goods from a certain country or in a certain industry sector, for example. They tend to drive up the price of those goods for consumers in the country where the tariffs are imposed, thus weakening demand. Mr Wong said: “(The introduction of SDRs) has widened the investment options for investors, but the nature of each SDR is still very different so investors need to consider carefully why they’d pick one over the other.
” In addition, there is still some currency risk, said Mr Wong. “Even if the underlying security has a stable share price and maintains its dividend, if there is going to be a sharp depreciation of the country’s currency versus the Sing dollar, this may still mean potential capital losses or lower dividend payouts in Sing dollars,” he explained. Individual countries’ tax rules and fees charged by the SDR issuer may also apply to these returns.
For instance, the SDR issuer charges a fee of up to 1 per cent for cash distributions arising from dividends. But for Mr Amir, liquidity and pricing risks make up the “biggest downside” of the SDRs. Liquidity refers to how many units are traded on a daily basis.
This is important as a highly liquid investment instrument is much easier for investors to buy and sell than a stagnant one. Liquidity is dependent on trading activity and market demand and “in some cases, SDRs may have lower liquidity compared to the actual securities listed on foreign exchanges”. “This can result in wider bid-ask spreads and potential challenges in executing buy or sell orders at desired prices,” he added.
CAN SDRS MAKE OVERALL SINGAPORE BOURSE MORE ATTRACTIVE? In response to CNA's queries, SGX said demand for the SDRs has been “promising so far”. Since their launch in May last year, the value of daily turnover of SDRs has increased seven-fold to S$1.7 million as of the end of November.
Total SDR assets under management tripled to S$14 million, with more than 50 per cent held by retail investors, a spokesperson told CNA. The more actively traded stocks include growth stocks like Tencent and BYD. Value stocks with strong dividend yields, such as HSBC and Bank of China, also appeal to investors seeking a passive income stream, SGX said.
SGX added that it will continue to expand its pipeline of SDRs based on investor demand. Analysts welcomed SDRs as a way to increase the offerings on the local stock market, which has been struggling to attract new listings and reeling from a lack of liquidity and poor valuations. But more time and effort may be needed to make SDRs more relatable to a broad swathe of local investors.
“So far, volume is still modest, but with greater education and awareness, it should pick up over time,” said Ms Lee..
