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ADR: Certificate or Stock?
What is behind the American Depositary Receipt?
Some of you may have noticed three small letters (ADR) behind the names of some stocks. Not only, but especially Chinese stocks traded on the American stock exchange belong to this category.
The Legal Background:
Strictly speaking, an ADR is a certificate issued by a U.S. bank and holds the underlying shares in custody. With an ADR, you do not directly acquire the stock, but the right to have the shares delivered – so-called depositary receipts. In fact, there is rarely a delivery, and the costs for it are relatively high.
The Background:
In a Sponsored ADR program, the company itself takes the initiative to be listed on an American stock exchange. For companies whose headquarters are not in the U.S., this step is otherwise associated with very high regulatory barriers and often not feasible. Especially because many American institutional investors such as pension funds or life insurance companies are subject to strict regulations regarding the acquisition of foreign company shares, ADRs are therefore the only way out. They are equated with “normal” stocks.
The Risks:
Rightly, many investors’ alarm bells ring when it comes to “certificates”. An original share is undoubtedly the best choice, if available. However, this type of stock market admission, that is ADRs, should not be a criterion for exclusion. It does, however, require careful examination on a case-by-case basis. Serious companies like a JD.com meet the requirements for Level 3, so they must present a consolidated financial statement according to US-GAAP. Please ignore companies that only comply with the standards of Level 1 or 2 in long-term investment.
The Facts:
- An ADR is actually a certificate that entitles the delivery of a share.
- The shares themselves are deposited at a depository bank.
- ADR programs are the easiest and often the only way for foreign companies to be listed on an American stock exchange. ADRs enable institutional investors in the USA to participate.
Our Conclusion:
Companies like Alibaba or JD.com are, to the best of human knowledge, just as reputable as Amazon or Google. Both companies have deliberately moved their IPO to the USA to facilitate the participation of major investors. Nevertheless, the skepticism of investors is understandable, as there have been inconsistencies, especially with (significantly smaller) Chinese companies and we even saw delistings of russian ADRs following the sanctions. Therefore, many ADRs are traded at a fundamental discount compared to similar companies. This can present opportunities.
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