TMT companies tap niche ADR route for long-term benefits

In 2005, financial analyst William Ng was tasked with kicking off Deutsche Bank's American Depositary Receipt business in the Chinese mainland, Hong Kong and Taiwan.

"At the beginning, it was pretty much a one-man shop," recalls Ng of his efforts to build the bank's market for ADRs, which are equity instruments that make it easier for non-US companies to list in the United States.

Ng says while he was "running around on the front line", his support staff consisted of only half the work hours of one other worker.

China is now one of the most important areas for Deutsche Bank's ADR business and the region with the strongest growth momentum thanks to China's Internet boom, according to Ng, now Deutsche Bank's director and head of sales for global equity services in Greater China.

The technology, media and telecom sector accounts for more than 90 percent of Deutsche Bank's ADR client base in China. The bank doesn't disclose details on its Chinese clients, but they include a string of big names, such as the NASDAQ-listed JD.com, China's second-largest e-commerce company, and YY Inc, a leading Chinese live video-streaming platform.

But so much money is changing hands amid China's tech boom that it has attracted lots of attention from top global banks, leading to stiff competition.

ADRs were created by JP Morgan for British luxury department store Selfridges in 1927. As a depositary bank, Deutsche Bank acts as a fiduciary agent for both the issuer and the investor, Ng explains. The company deposits its common shares in the bank and the bank creates and issues the ADR, which can represent a fraction of a share or multiple shares.

It is a repackaging of a company's shares that makes it easier for both a foreign company to enter the US capital market and the US investor to buy shares in a non-US company.

TMT is by far the leading sector for Chinese companies to list in the US and the sector's dominance is expected to grow, Ng says.

"The US market provides Chinese TMT companies with a comparatively friendlier growth environment. Regardless of whether you are listing on NYSE or NASDAQ, there are more flexible regulations," Ng says. "Another reason is that most of the Chinese TMT companies have business models that originate in the US."

An increasing number of Chinese Internet companies have been rushing to go public in the United States since the second half of 2013 after Wall Street closed its doors to Chinese companies for two years because of accounting scandals and critical reports from short-sellers.

Hong Kong-based Ng is confident in the potential of China's TMT sector and his company's ADR business in the region. Because of the large number of Chinese Internet companies seeking to raise capital in the US, he travels to the Chinese mainland every week.

He views the TMT sector as a beneficiary of China's policy of supporting small and medium-sized enterprises and providing a healthy environment for their growth.

"The Chinese market is so big; there will be a steady stream of companies that will make it," Ng says, "and some will grow to a certain size, become a leader in their industrial segment and then they might reach the stage to go ahead with an IPO."

While ADR is considered a niche market, it's not an easy one. While few banks offer the service, those that do tend to be large, strong competitors, Ng says.

Aside from Deutsche Bank, the other leaders in ADR are JPMorgan Chase, Citigroup and Bank of New York Mellon. Together they contribute to a highly competitive and pressurized market with falling margins and a higher expectation of service by clients.

"Pretty much every one of our deals came after severe competition," Ng says. "To win any of them is no easy feat."

At this stage, the IPO candidate that everyone on Wall Street is trying to woo is Alibaba Group Holding Ltd, a dominant force in China's e-commerce industry. When asked whether Deutsche Bank would pitch for Alibaba's ADR business, Ng said he can't comment on individual companies.

However, it doubtless would be difficult for any company in the world to pass up the opportunity to participate in a deal with the potential to raise $20 billion in the US.