Before we explain ADR/ADS, let's take a look at the rules governing the listing of non-American companies on US stock exchanges.
According to the relevant policies of the US government, companies registered outside the United States are not allowed to be listed directly in the United States. So if foreign companies want to raise money in the US market, there are two ways:
Direct listing: register a company in the United States, and then pack the main body of the listing into the United States company.
Indirect listing: listing through ADR/ADS.
Compared with Cayman, Virgin Islands and other places, the US government has much stricter supervision over listed companies, with long listing time, high cost and high taxes, so a large number of companies choose indirect listing, that is, ADR/ADS listing through American depositary institutions.
What is ADR?
ADR, or American depositary receipts (American Depository Receipts), are depositary receipts issued by American depositary banks, sold to American investors and traded on the American securities market. Each ADR represents the corresponding shares of the listed company according to the corresponding exchange ratio.
For example, suppose the shares of ABC, a fictional Australian company, are traded on the Australian Stock Exchange at A $6.70 (US $5), and Bank of America Corporation buys a certain amount of ABC shares at 2:1 and sells ADR. Therefore, each ADR represents two shares of ABC and should therefore be sold at a price of $10.
ADR is kept in the vault of Bank of America Corporation, where they were issued, and ADR simplifies the process of exchanging foreign shares: by trading only receipts, investors do not have to worry about any exchange rate differences or need to open special brokerage accounts, and entitle investors to all dividends and capital gains.
What is ADS?
ADS, American Depositary shares (American Depository Shares), is the actual underlying stock represented by ADR.
It can be understood vividly that ADR is the proof of investors' ownership of ADS, just like the property certificate to the house. When trading, transfer the property certificate, there is no need to move the house here. However, usually a property certificate can only represent a house, but an ADR can represent a number of ADS.
For example, a British company, XYZ, can trade ADR on the New York Stock Exchange, and these ADR can be issued at five ADR equal to one American depositary share (5:1) or at any other rate the company chooses. The underlying ADS usually corresponds directly to the common stock of a foreign company, in other words, the ratio of ADS to common stock is usually 1, while the ratio of ADR to ADS is freely set by the company.
What is the difference between ADR/ADS?
1. The face value is different:
Most of the par value of ADS is only a fraction of the par value of collateralized stocks, while ADR mostly uses several units (such as 10 shares) as a unit of ADR.
2. Different initiating methods:
ADS is sponsored by stock issuers that want to attract US investors without having to list on the US market. ADR says interest in foreign stocks that U. S. citizens can buy is initiated by banks and brokerage firms.
3. The client is different:
ADS is issued in the United States by a trustee authorized by a foreign company (Trustee). ADR is a transferable certificate issued by American commercial banks to facilitate the trading of foreign securities in the United States.
Is there any difference between Tencent ADR (TCEHY) and BABA ADR (BABA)?
Let's go back to a knowledge point that we want to focus on today, why some Chinese stocks ADR look different.
There are mainly two kinds of companies, one is companies that have directly issued ADS for formal trading in the United States, such as BABA, Pinduoduo, Futu Holdings Limited, NIO Inc., and so on; the other is Tencent ADR (TCEHY), Meituan ADR (MPNGY), BYD ADR (BYDDY) and other companies, which are not officially listed on the US securities market and are only traded in OTC (over-the-counter market).
Generally speaking, because the first kind of ADR is officially listed for trading, its trading volume is not low, and the market activity is OK. Because the second kind of ADR belongs to OTC trading, the trading volume is generally small, so there will be liquidity problems.
The relationship between Tencent (00700.HK) and Tencent ADR (TCEHY)?
It should be said that both of them are Tencent's shares, but one is circulated in the Hong Kong stock market and the other in the United States. Tencent ADR is that Tencent Company took out a part of the stock and hosted it in the Hong Kong branch of a qualified US institution, and then the US headquarters of this institution took out the corresponding ADR to trade in the US market.
The prices of the two are consistent, one in US dollars and the other in Hong Kong dollars. Moreover, generally speaking, the price of Tencent's Hong Kong shares is the main, and the trend of Tencent's ADR will be affected by the trend of Hong Kong stocks before the trading time.
It is worth mentioning that now many companies often release important information after the closing of Hong Kong stocks, such as annual and quarterly reports, and the timeliness of the capital market chasing information is global. Therefore, judging from the situation in recent years, after Tencent released his financial report, during the US trading session that day, Tencent ADR often received heavy news, which led to obvious price fluctuations. And this fluctuation will in turn have an impact on the price of Tencent Hong Kong shares after the opening of Hong Kong stocks the next day.
The linkage of the above stock prices is not absolute, but it also requires the focus of investors. Once there is an obvious difference in market prices between the two places, the room for arbitrage cannot be ruled out.