Singaporean investors can now seamlessly invest in three Thai-listed stocks directly on SGX via the newly launched Singapore Depository Receipts. How do these instruments work, and should you invest in them?
On 30 May 2023, the Singapore Exchange (SGX) launched a new product for investors in Singapore.
Known as Singapore Depository Receipts (SDRs), these instruments provide retail investors with a simpler, more convenient manner to trade stocks of foreign companies.
Here’s a look at how SDRs work, what risks they carry, and who they are meant for.
Table of contents
- What are Singapore Depository Receipts (SDRs)?
- Which foreign companies are available via SDRs?
- Benefits of investing in SDRs
- Risks of investing in SDRs
- Should you invest in SDRs?
What are Singapore Depository Receipts, and how do they work?
Singapore Depository Receipts (SDRs) are instruments that represent beneficial interest in an underlying security listed on an exchange overseas. In simple terms, think of them as “tokens” of foreign company stocks that you can trade right on the SGX.
With SDRs, Singaporean investors can gain exposure to foreign companies without directly owning the respective stocks and shares. Also, SDRs are traded in Singapore Dollar, which saves the need for investors to pay currency exchange fees.
It’s important to note that SDRs are not actual shares, nor are they derivatives. Instead, they are instruments issued by an intermediary (the “SDR issuer”) and are convertible 1:1 with the underlying stocks.
SDRs entitle holders to corporate and financial actions such as dividends, stock splits and shareholder meetings. However, the actual extent of these rights may vary across different SDRs.
Dividends due are paid out to SDR holders in Singapore Dollar, just like any proceeds generated from trades.
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What foreign companies are available via SDRs?
For a start, the SGX is offering SDRs for three well-known Thai companies in consumer defensive, aviation and tourism, and energy and oil.
SGX Trading Code
(SDR name: CPAll TH SDR)
CP ALL, the sole operator of the 7-Eleven franchise of convenience stores in Thailand, which total over 13,000 outlets at the time of writing.
(SDR name: AOT TH SDR)
AOT, which operates all six international airports in Thailand, including Suvarnabhumi Airport in Bangkok, Phuket International Airport, and Hat Yai International Airport.
(SDR name: PTTEP TH SDR)
PTTEP, a national petroleum exploration and production company.
These are some pretty big names indeed, and depending on how bullish you are about the prospects of the Thai economy, certainly worth considering if you’re looking to expand your portfolio.
What are the benefits of investing in SDRs?
Convenience and cost-savings
Two key benefits of investing in SDRs are convenience and cost-savings.
Firstly, as mentioned, you can simply look up the respective counters on SGX and trade them directly on the exchange, without having to sign up for a brokerage account that offers Thai-listed stocks. You will also follow local trading hours.
Secondly, you can trade using Singapore Dollars, which means you do not have to hold foreign currency, nor pay currency conversion fees. Furthermore, proceeds and dividends are settled in Singapore Dollar, which is just about as convenient as it gets.
Thirdly, you will be subject only to local brokerage fees and charges, without additional overseas trading fees, management fees, etc.
Transparency and dependability
SDRs are held in custody on your behalf in the Central Depository (CDP) account. This ensures your rights and entitlements that come with being a holder of the instruments.
If you happen to hold a non-CDP linked account, your SDRs will be held in sub-accounts under Philips Securities.
Additionally, announcements on corporate actions and events that relate to the SDRs will be published on the websites of both the SDR issuer and SGX.
What are the risks of investing in SDRs?
Company and market risk
Even though SDRs are not stocks per se, they provide beneficial interest to the respective underlying assets. On the flipside, this also means that investors are exposed to the usual shareholder risks, including company and market risk.
Thus, be aware that the value of your SDR will fluctuate in tandem with the underlying stocks, which may in turn be affected by overall market conditions and macroeconomic risks.
When evaluating their performance, you should treat your SDR holdings as if they were the actual stocks.
Exchange rate risk
While you do not have to pay any currency conversion charges, your SDRs aren’t immune to foreign exchange risk.
Fluctuations in exchange rates between the Singapore Dollar and the Thai Baht mean SDRs may not always perfectly track the prices of their underlying assets. This may lead to SDRs being traded at premium or discount at times.
While this may not be an issue for most retail investors adopting a long-term buy-and-hold strategy, it is nevertheless worth noting, in case you find yourself wanting to dispose of your SDRs in a hurry.
Another risk that investors may face is liquidity risk. Just as with any security, SDRs may suffer from low liquidity due to market factors. This can make it difficult to sell your SDR holdings in a timely manner, or penalise you with a high bid-ask spread.
Given the pedigree of the three Thai companies selected for this initial launch, the chances of this happening is slim. Nevertheless, it is still important to be aware of this risk.
Foreign law risk
Do remember that the assets linked to your SDRs are ultimately governed by the prevailing laws of the country that the stock-issuers are registered in – in this case, Thailand.
There could be certain circumstances or laws which may impact your rights and entitlements, and proceeds may not be guaranteed to be remitted under special circumstances.
Note that SGX does not regulate the issuer of the underlying securities, which means that the stocks you are exposed to are not subject to the same disclosure standards and listing requirements.
In other words, doing your due diligence is important, and you should not blindly invest just because these instruments are listed on the SGX. At a minimum, do review the full list of risks noted by SGX before jumping in.
Should you invest in SDRs?
SDRs are designated as “Excluded Investment Products" (EIP) which are generally for investors who expect low to moderate likelihood of loss of principal investment amount, with generally smaller potential returns.
In layman speak, this means that SGX expects SDRs to be low-risk, low-returns investments that are best placed in a conservative portfolio. Due to their relatively uncomplicated nature, SDRs are deemed suitable for investors of all levels, as long as there is basic understanding and knowledge of how investing in the market works.
We’ll also add: If you feel strongly about the three Thai companies included under the scheme, and are convinced that they are worthy additions to your portfolio, then SDRs are just about the most convenient and cost-effective manner to invest in them from Singapore.
It is conceivable that SGX will expand this scheme to include stocks and shares from other countries and sectors, which you may be even more excited by. Hence, you may want to pace yourself, and keep some dry powder handy just in case.
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