What is ADR?
Before explaining ADR/ADS, let's first understand the issuance rules for non-US companies to be listed on the US stock exchange.
According to the relevant policies of the US government, companies registered outside the US are not allowed to directly list in the US. Therefore, if an overseas company wants to finance in the US market, there are two paths:
Direct listing: Register a company in the US, then package the listed entity into the US company;
Indirect listing: listing through ADR/ADS.
Compared to places such as Cayman and the Virgin Islands, the US government has much stricter regulations on listed companies. The listing time is long, the cost is high, and the tax is heavy. Therefore, a large number of companies choose the method of indirect listing, that is, issuing ADR/ADS listings through depository institutions in the US.
What is ADR?
ADR, or American Depository Receipts (American Depository Receipts), is a depository certificate issued by the American Depository Bank, sold to US investors and traded on the US securities market. Each ADR represents the corresponding listed company stock according to the corresponding exchange rate.
For example, let's say the shares of ABC Company (a fictional Australian company) are traded at a price of 6.7 Australian dollars (5 dollars) on the Australian Stock Exchange, and an American bank buys a certain amount of ABC shares at a 2:1 ratio and sells ADR. Therefore, each ADR represents two shares of ABC Company and should therefore be sold at a price of $10.
ADR is stored in the vault of the Bank of America that issued them, and ADR streamlines the process of exchanging foreign shares: since only receipts are traded, investors don't need to worry about any exchange rate differences or need to open a dedicated brokerage account, and investors are entitled to all dividends and capital gains.
What is ADS?
ADS, American Depository Shares (American Depository Shares), is the actual underlying stock represented by ADR.
It can be interpreted graphically as an ADR is a document certifying the investor's ownership of ADS, just like a real estate certificate for a house. At the time of the transaction, just transfer the real estate certificate; there is no need to move the house over. However, usually a real estate certificate can only represent one house, but an ADR can represent a number of ADS.
For example, a British company, Company XYZ, can trade ADRs on the New York Stock Exchange, and these ADRs can be issued at 5 ADR equal to 1 American Depositary Share (5:1) or any other ratio chosen by the company.
What is the difference between ADR/ADS?
1. The face value is different:
The face value of ADS is mostly only a fraction of the face value of the collateral stock, while ADR mostly uses several units (such as 10 shares) to pledge shares to act as one unit of ADR.
2. Different initiation methods:
ADS was sponsored by stock issuers that wanted to attract US investors without having to be listed on the US market. ADR indicates an interest in foreign stocks that US citizens can buy, and is initiated by banks and brokerage firms.
3. The client side is different:
ADS is issued in the US by a foreign company authorized by a US trustee (Trustee). ADR is a transferable certificate issued by a commercial bank of the United States to assist in the trading of foreign securities in the US.
Is there a difference between Tencent Holdings ADR (TCEHY) and Alibaba ADR (BABA)?
Back to one of the knowledge points we want to focus on today, why do some Chinese securities ADRs look different.
There are two main types. One is a company that directly issues ADS officially listed and traded in the US, such as Alibaba, Pinduoduo, Futu Holdings, NIO, etc.; the other is Tencent Holdings ADR (TCEHY), Meituan ADR (MPNGY), BYD ADR (BYDDY), etc., which are not officially listed on the US stock market and only traded on OTC (OTC).
Generally speaking, since the first type of ADR is an official listing transaction, its trading volume is not very low, and the market activity is OK. Since the second type of ADR is an OTC transaction, the transaction volume is generally small, and there will be liquidity problems.
The relationship between Tencent Holdings (00700.HK) and Tencent Holdings ADR (TCEHY)?
It should be said that both are Tencent shares; only one circulates in the Hong Kong stock market and the other is in circulation in the US stock market. Tencent Holdings ADR is a division of shares offered by Tencent and managed by the Hong Kong branch of a qualified US agency, and then the US headquarters of this institution sells the corresponding ADR in the US market.
The prices of the two are consistent. One is calculated in US dollars and the other is calculated in Hong Kong dollars. Also, generally speaking, the price of Tencent Holdings Hong Kong stocks is the main one. Before the trading time is ahead, the trend of Tencent Holdings' ADR will be affected by the trend of Hong Kong stocks.
It is worth mentioning that many companies now often publish important information, such as annual and quarterly reports, after the Hong Kong stock market closes, and the timeliness of capital market tracking information is global. Therefore, judging from the situation in recent years, after Tencent Holdings releases financial reports, during the US trading session on the same day, its Tencent Holdings ADR often receives major news and causes significant price fluctuations, and this fluctuation will in turn have an impact on Tencent's Hong Kong stock prices after the Hong Kong stock market opens the next day.
The above linkage of stock prices is not absolute, but it also requires investors to focus their attention. Once there is a clear difference in prices between the two markets, it is not ruled out that there is room for arbitrage.
