On 30 October 2024, the Singapore Exchange (SGX) introduced the Hong Kong SDR.
The Hong Kong SDR allows investors to buy, hold and sell the beneficial interests of 5 securities namely, Tencent, Alibaba, BYD, HSBC and Bank of China in Singapore Dollars on the SGX.
Now, you may wonder: “While this is great for investors in Singapore, but here, as investors who are based in Malaysia, how does this benefit us?”. To answer this, I’ll share what SDRs are, how they work and explain briefly how it can benefit local investors in Malaysia. Then, I’ll end it with a list of related materials on this topic. They are as follows:
1. What are SDR?
A “SDR” are known as Singapore Depository Receipt.
SDR represents beneficial interest in an underlying security (Tencent, Alibaba, BYD, HSBC, and Bank of China) that is listed overseas (Hong Kong). Investors who own SDR would be eligible to receive dividends in Singapore Dollars and convert their SDR into actual shares of these stocks.
2. How Does It Work?
Let’s use BYD as an example.
As investors, we can choose either to invest in BYD’s shares directly on the HKEX or to invest in BYD’s SDR on the SGX.
To invest in BYD’s shares directly on the HKEX, its minimum board lot is 500 shares. At present, BYD is trading at HK$ 289.60 a share. So, the minimum amount of capital to invest in BYD is as much as HK$ 144,800 or RM 81,249 for 500 shares per transaction. The beauty is that you shall own BYD’s shares directly and officially be its shareholder.
Alternatively, you could invest in BYD’s SDR. Today, the SDR:Underlying Securities Ratio for the company is set to be 10:1. It means that you can convert 10 BYD’s SDR into 1 BYD’s share and vice versa. The price of BYD’s SDR is calculated as follows:
The minimum board lot set for all stocks listed on the SGX is 100 shares. As such, the minimum amount of capital to invest in BYD’s SDR is S$ 492 or RM 1,630 for 100 BYD’s SDR. Surely, the obvious benefit is the access to participating in BYD for a significantly lower amount of capital.
3. To Buyers
Imagine investors, who either could not afford to invest in BYD directly or wish to own below 500 shares of BYD, they can invest indirectly via BYD’s SDR.
For instance, let’s say we have 3 investors who want to build a RM 50k, RM 200k, and RM 500k stock portfolio. Prior to the SDR, the first investor won’t invest in BYD as he cannot afford it. The second investor would have a higher weightage of 40.6% on BYD while the third investor would have a weightage of 16.2% assuming that both investors wish to invest in 500 shares of BYD. In this instance, BYD is either unaffordable or inflexible in terms of portfolio building.
But with the Hong Kong SDR, all 3 investors can invest in BYD. Let’s assume that all 3 investors want to limit their holdings in BYD to just 10% of their respective portfolio. Thus, they may invest RM 5k, RM 20k and RM 50k in 300, 1,200, and 3,000 BYD’s SDR to fulfil their unique objectives for their portfolios. Thus, it is more affordable and flexible for the purpose of portfolio building.
4. To Sellers
Let’s turn the situation around.
What if you are an investor who owns 500 shares of BYD worth RM 81,249 and you like to raise just RM 10,000 to meet an emergency? Here, let’s assume the extreme, whereby you’d used up all your liquid assets and are really left with this asset. What can you do?
Before the Hong Kong SDR, you may be forced to sell off your shares to raise that RM 10,000. I find that to be inflexible.
Now, with the Hong Kong SDR, you can convert some or all your BYD’s shares into BYD’s SDR. For instance, the 500 BYD shares could be converted into 5,000 BYD’s SDR. Then, you can sell off 600-700 BYD’s SDR to raise RM 10,000 to pay your bills. The remaining 4,300-4,000 SDR is still with you and you can continue to derive economic benefits from BYD.
There are fees applied for such a conversion but still, it enables us to retain most of our holdings
in BYD without needing to liquidate it all. So, it is good to have that option available.
5. The Other 4 Hong Kong SDRs
Apart from BYD, here are the summarised details of the four stocks and their remaining SDRs:
Clearly, the introduction of SDR has added affordability to the above stocks listed in Hong Kong. The choice between investing in shares directly or SDR is dependent on one’s financial status & affordability. For instance, if an investor could afford to invest RM 5-10k per transaction, in his or her case, the investor can choose between direct ownership of shares or SDR for Bank of China or Alibaba. But, as for BYD, Tencent and HSBC, he or she could participate via SDR.
Conclusion:
In short, the key benefits for SDR are affordability and flexibility. It does not change the business fundamentals of any of these companies. Investors should first assess the business models and profitability of these stocks prior to making investment decisions on them. For information on the topic of SDR, check out the following materials:
SGX – Singapore Depository Receipts (SDR)
For those of you, who intend to learn how to build a Dividend-based Portfolio or a Growth-based Portfolio, once again, it is a matter of suitability between the educator and yourself. Below would be the links to free webinars so that you can check us out and assess if we’re the right fit for you personally.
Dividend Investing:
Free Webinar: How to Build a Stock Portfolio that Pay Increasing Dividends?
Growth Investing:
Online Training: Case Study of 1 Actual Stock that I had Invested in and Why It Doesn’t Take High Risk to Generate High Returns in the Stock Market?
