Value-unlocking moves will enliven market more than any new SDRs, Catalist listings

LOCAL investors are gaining access to a wider range of exciting stocks through the Singapore Exchange (SGX) platform.

No, I’m not alluding to the recent debut of restaurant player Food Innovators, or the imminent listings of interior decorator Attika Group and karaoke lounge operator Goodwill Entertainment.

Instead, I’m referring to the launch last week of the Singapore Depository Receipts (SDRs) covering five Hong Kong stocks: Alibaba, Tencent, BYD, HSBC and Bank of China.

These Hong Kong stocks were not previously beyond the reach of Singapore investors, of course – many brokerage firms already offer easy access to the Hong Kong market.

The Hong Kong SDRs, however, are priced in Singapore dollars and can be traded like any SGX-listed stock, with purchases and sales reflected in the Central Depository (CDP) statements of investors.

Each of the five new SDRs also offers exposure to their underlying Hong Kong stocks at relatively low minimum investment amounts, which provides investors with more flexibility in managing their exposure.

For instance, purchasing one board lot of 500 shares of BYD in the Hong Kong market on Sep 30 would have cost the equivalent of S$23,433.

In contrast, the minimum investment in the BYD SDR would have been just S$469. That’s because the ratio of the BYD SDR to its underlying stock is 10:1, and all the SDRs trade in board lots of 100 units.

Taking another example: the ratio of the HSBC SDR to its underlying stock is 5:1, while HSBC trades in the Hong Kong market in board lots of 400 shares.

On Sep 30, purchasing one board lot of HSBC shares in Hong Kong would have cost the equivalent of S$4,654, whereas purchasing 100 units of the SDRs would have cost just S$233.

Another aspect of these SDRs that could make them interesting is that they can be traded just before and just after Hong Kong market hours – between 9 and 9.30 am, and between 4 and 5 pm.

Are these SDRs the next big thing for the Singapore market? Could they make the local market more vibrant despite its weak long-term performance, and the absence of high-quality new listings?

New SDRs a catalyst

The way I see it, Singapore investors have always had an inclination to look beyond their shores. It is why the Clob market was such a big deal back in the 1990s, and it is why S-chips caught fire in the 2000s.

SGX said last week that the new SDRs complement existing products that offer exposure to Hong Kong and China, including structured warrants, daily leveraged certificates (DLCs) and exchange-traded funds.

There were already eight SDRs in the local market, providing exposure to major Thai companies: Airports of Thailand, Delta Electronics, Advanced Info Service, PTT Exploration and Production, Gulf Energy Development, CP All, Siam Cement Group, and Kasikornbank.

SGX said the daily turnover of these eight SDRs was S$500,000 as at the end of September.

It would not surprise me if the five Hong Kong SDRs became popular, and catalysed broader interest in the Thai SDRs.

As a buy-and-hold stock investor, SDRs are far more appealing to me than structured warrants and DLCs.

Moreover, the underlying stocks of the five Hong Kong SDRs are well known even in Singapore.

Most importantly perhaps, the Hong Kong SDRs have been launched in the wake of a big effort by China to reflate its economy and asset markets. This makes it quite likely that local investors will have a positive first experience with these new SDRs.

Unexciting new listings

What about the new listings such as Food Innovators, Attika Group and Goodwill Entertainment?

My own view is that these companies will struggle to win over investors – at least until they establish a decent track record of operational and financial performance.

It isn’t just that these companies are very small and fraught with risks, but that investors may not find their businesses to be all that interesting in the first place.

Food Innovators, for instance, has two seemingly mundane operations: food retailing in Japan, Singapore and Malaysia, and restaurant leasing and subleasing in Japan.

The company raised gross proceeds of nearly S$3.1 million through the sale of 14 million shares at S$0.22 each. Nearly two-thirds of this went to professional services and other costs related to its listing. Only S$1 million is being put towards expanding its businesses.

Food Innovators closed Friday (Nov 1) at S$0.20, putting its market capitalisation at just S$22.6 million.

Attika Group’s businesses also seem rather dull: commercial interior decoration and mechanical, electrical and plumbing engineering. The company is expected to begin trading on Catalist on Nov 8, after raising gross proceeds of S$4.6 million through the placement of 21 million shares at S$0.22 each.

It would have a market capitalisation of S$29.9 million at the placement price.

Goodwill Entertainment might be an exception, though. The company operates the “HaveFun” chain of karaoke outlets, some of which include spaces for band performances and other live acts.

This could make its stock relatable to a broad swathe of local investors.

The company sold 60 million shares to investors, comprising 42.5 million new shares and 17.5 million vendor shares, through a placement at S$0.20 each. It would have a market capitalisation of S$80 million at the placement price.

Goodwill Entertainment is scheduled to begin trading on Catalist on Nov 15.

Value unlocking still key

This brings me to another interesting story unfolding in the local market: Hongkong Land’s new corporate strategy.

On Oct 29, the company said it will focus on generating recurring income from investment properties in Asia’s gateway cities, and no longer invest in its build-to-sell segment.

By 2035, the group aims to recycle up to US$10 billion in capital and expand its assets under management from US$40 billion to US$100 billion, through a combination of capital partnerships, private funds and real estate investment trusts.

In the process, the group wants to double its underlying profit before interest and tax, and its dividend per share.

Hongkong Land, which had a net asset value of US$13.82 per share as at June 30, is essentially pursuing a big value-unlocking exercise and repositioning itself to better deliver shareholder value.

Its shares closed Friday at US$4.48 – up 15.2 per cent since the announcement of its new strategy.

Hongkong Land has a market capitalisation of about US$9.9 billion, and is among the 30 components of the Straits Times Index.

If it succeeds in improving the long-term market value of its shares, other prominent real estate groups could be motivated to emulate its strategy.

This would arguably do more for the vibrancy of the local market than any number of new SDRs or Catalist listings.