Gain exposure to Alibaba through Singapore Depository Receipts (SDRs) of Hong Kong stocks

This article was created in partnership with SGX. The views and opinions expressed are Beansprout's objective and professional opinions.

What happened?

Singapore investors can now access some of Hong Kong’s most prominent stocks through Hong Kong Singapore Depository Receipts (SDRs), which SGX recently launched. 

The Hong Kong SDRs are available from 30 October 2024. 

These HK SDRs offer investors a more accessible way to invest in five Hong Kong-listed companies: Alibaba, Bank of China, BYD, HSBC, and Tencent.

We explore key points to consider when investing in Hong Kong SDRs and how to get started with SDR investments.

What are Hong Kong SDRs?

The launch of Hong Kong SDRs in Singapore opens investment avenues in well-known Hong Kong-listed companies such as Alibaba, Bank of China, BYD, HSBC, and Tencent. 

SDRs make it easier for investors in Singapore to purchase stocks listed in overseas exchanges.

By investing in an SDR, you gain access to an underlying stock, which is currently listed on an overseas exchange.

This means that you can do it on the Singapore Exchange (SGX) rather than buying the stock through an overseas stock exchange.

For instance, investors who want to invest in China electric vehicle (EV) companies like BYD can easily purchase the BYD SDR on SGX. 

To learn more about SDRs, read our guide to Singapore Depository Receipts here. 

Why invest using Hong Kong SDRs?

Hong Kong SDRs provide several advantages, particularly for investors looking to invest in these companies with lower capital outlay and managing their positions on a single platform.

#1 – Bite-sized investment amounts 

HK SDRs allow investors to access shares of Hong Kong blue-chip companies with a smaller initial investment amount.

Hong Kong-listed stocks have different board lot sizes. For instance, Alibaba’s board lot size is 100 shares, and BYD’s lot size is 500 shares. 

This means the minimum investment size for Alibaba stock in Hong Kong is S$1,816. 

However, the HK SDRs are standardised to 100 shares per board lot. With a ratio of SDR to underlying of 5:1 for Alibaba, it means that the minimum investment to purchase Alibaba through a Hong Kong SDR will just be S$363. 

This is lower than the minimum investment amount of S$1,816 to purchase Alibaba stock in Hong Kong. 

#2 – Complements existing Hong Kong/China products on SGX

HK SDRs add another option to the suite of Hong Kong and China-related financial products on SGX, which includes structured warrants (SW), daily leverage certificates (DLCs), and exchange-traded funds (ETFs). 

This broad array of options allows investors to build a diverse portfolio of Hong Kong and China assets directly on the Singapore Exchange instead of the Hong Kong Stock Exchange. 

In addition, investors can pair trades and seamlessly make timely, informed, strategic decisions all in one place. 

For example, investors bullish on Alibaba in the long term but wish to hedge against short-term market volatility could long the Alibaba SDR while simultaneously shorting Alibaba using a daily leverage certificate (DLC) as a hedge against near term uncertainty. 

Such an ecosystem in the Singapore stock market offers investors flexibility in risk management, as they can choose different instruments to align with their investment goals or trading strategies. 

You can learn more about the full suite of products to gain exposure to China through the SGX here. 

#3 – Potentially lower cost

Another advantage of trading HK SDRs on the Singapore Exchange is the cost savings compared to purchasing stocks directly on the Hong Kong Exchange. 

Some brokers charge a minimum fee for transactions on the Hong Kong Exchange, making direct purchases of Hong Kong-listed stocks potentially more expensive for smaller trades than SDRs, which are listed and traded on the SGX. 

Additionally, there are no foreign exchange charges when trading in SGD on SGX, and investors with direct Central Depository (CDP) accounts avoid custody fees entirely. 

These savings make HK SDRs more cost-effective for diversifying their portfolios with Hong Kong blue-chip stocks.

#4 – Convenience

You can also trade the HK SDR during Singapore’s local market hours, which run from 9:00 a.m. to 5:16 p.m. SGT. 

This allows investors to make trading decisions and execute trades ahead and after the Hong Kong market hours, which opens from 9:30 a.m. to 4:00 p.m. HKT. 

Trading HK SDRs on SGX provides a strategic edge by enabling investors to act on pre-market news or trends, between 9 to 930am, before the Hong Kong market opens.

Holding HK SDRs also provides investors with the convenience of having their dividends paid in Singapore dollars (SGD), as the SDRs are custodised with the Central Depository (CDP). 

This eliminates any foreign exchange (FX) risk on dividend income, allowing investors to enjoy their returns in SGD. 

This makes HK SDRs a more stable option for investors looking for steady returns without exposure to FX fluctuations.

Hong Kong SDRs to keep a lookout for 

China’s recent economic stimulus measures have sparked renewed investor optimism, fueling a surge in China-related stocks. 

In particular, the share prices of leading tech giants like Alibaba and Tencent have bounced significantly. 

#1 – Alibaba (SGX: HBBD)

Alibaba began as an e-commerce platform but has grown far beyond online shopping. 

Today, it’s a tech conglomerate with businesses in cloud computing, logistics, local services, and entertainment. 

For the quarter ending June 2024, Alibaba reported a 4% year-on-year increase in revenue. However, its net income dropped by 27%, due to impairment from its investments. 

The company’s core e-commerce platforms, Taobao and Tmall, dominate the Chinese market despite cautious consumer spending this year.

Alibaba’s international e-commerce revenue from platforms like AliExpress and Lazada, grew by 32% year-on-year in the most recent quarter.

It’s worth noting that Alibaba’s cloud computing division, which saw a 6% revenue increase year-on-year, is expected to drive future growth as the company invests more in AI-driven products. 

In addition, its logistics arm, Cainiao, saw a 16% year-on-year increase in revenue over the same period. 

China’s recent stimulus packages may also help boost consumer spending and benefit Alibaba domestically. 

On the other hand, the company may face continued challenges from sluggish consumer spending and competition from other e-commerce platforms such as JD.com and Temu. 

Alibaba’s stock has risen 26.1% year-to-date (YTD) as of 25 October 2024. 

#2 - Tencent Holdings (SGX: HTCD)

Another tech giant in China, Tencent has seen much of its growth driven by popular mobile games like Honor of Kings, Peacekeeper Elite, and Dungeon & Fighter.

Beyond gaming, Tencent’s WeChat platform, with over 1.3 billion users, serves as a super app, enabling everything from social networking and payments to e-commerce and entertainment. 

Tencent’s diversified portfolio includes music streaming, cloud services, and enterprise software. 

In the second quarter of 2024, Tencent reported a strong 82% increase in earnings year-on-year. 

Revenue from its China games business rose 9% year-on-year, and international games rose 9% over the same period. 

Its online advertising business, driven by video ads on WeChat, generated 29.9 billion yuan in revenue, a 19% year-on-year increase. 

It might be worth noting that Tencent still faces regulatory pressures with the Chinese government’s increased scrutiny of tech companies. 

As of 25 October 2024, Tencent’s stock price rose by 43.4% year-to-date. 

What are some risks when investing in HK SDRs? 

Investing in HK SDRs offers notable benefits, but investors should consider a few risks.

#1 - Market risks

While China’s growth potential is promising, the country’s regulatory environment can be unpredictable. 

Government policy shifts, particularly in technology, finance, and property sectors, can impact company performance and, in turn, investor returns.

#2 - Foreign currency risk 

HK SDRs trade in Singapore dollars (SGD), but the underlying securities are priced in Hong Kong dollars (HKD). 

Currency exchange fluctuations between SGD and HKD can impact the SDR’s trading price and the value of distributions. 

If HKD weakens significantly against SGD, investors may face reduced returns.

What would Beansprout do?

HK SDRs present a convenient alternative for investors interested in adding exposure to Hong Kong-listed stocks.

In particular, Hong Kong-listed stocks such as Alibaba and Tencent can now be purchased with a lower minimum outlay through SDRs. 

These SDRs will also be custodised in your CDP account. 

You can purchase HK SDRs on the Singapore Exchange during trading hours directly through a stock trading platform that offers trading on the Singapore Exchange. 

Learn more about the newly launched HK SDRs here. Also, join our upcoming SGX Academy webinar on 12 November, where we will share more about HK SDRs.

You can find out more about other SGX-listed products that provide exposure to China here.

SGX also offers Thai SDRs for investors looking to access stocks in the Thai market.

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