American Depositary Receipt (ADR) is a negotiable certificate issued by a U.S. depositary bank, representing the stocks of non-U.S. companies. It allows U.S. investors to indirectly hold equity stakes in foreign companies by trading in U.S. dollars. Below is an interpretation from the aspects of concept, characteristics, precautions and practical cases. Essentially, ADRs are bridges for cross-border investment. Their operating process is as follows: a foreign company deposits its stocks with a local bank (i.e., the custodian bank), and a U.S. depositary bank (such as JPMorgan Chase, Citigroup, etc.) issues ADRs based on these stocks for trading on the U.S. market. Each ADR corresponds to a certain number of underlying stocks (the conversion ratio is determined by the depositary bank). For example, Alibaba’s ADR adjusted the number of common shares corresponding to each ADS (American Depositary Share) from 1 to 8 in 2019, enabling investors to participate in trading at a lower unit price. The issuer of an ADR is generally a foreign company, but it must be registered with the U.S. Securities and Exchange Commission (SEC). ADRs are divided into three levels based on listing standards: Level 1 ADRs only trade on the Over-the-Counter (OTC) market, with relatively loose regulatory requirements, such as Tencent’s ADRs (with a Y suffix in the ticker symbol); Level 2 ADRs can be listed on the New York Stock Exchange (NYSE) or Nasdaq, but cannot issue new shares; Level 3 ADRs allow public issuance of new shares and must comply with the disclosure requirements of U.S. domestic listed companies. Companies like Alibaba (BABA) and JD.com (JD) adopt this type. ADRs are denominated in U.S. dollars, and their trading hours and rules are consistent with U.S. stocks, which greatly reduces the cross-border trading costs for U.S. investors. For instance, in 2025, XPeng Motors’ ADRs saw a sharp increase in daily trading volume after Macquarie upgraded its rating to "Outperform", reflecting its liquidity advantage. In addition, ADRs can be bought and sold through regular brokerage accounts, without the need to open an overseas account separately. Dividends are paid in U.S. dollars (with taxes withheld by the depositary bank), and voting rights are exercised on behalf of ADR holders by the depositary bank. Take Bank of Communications International as an example, it charges a collection fee of 1% of the dividend amount (minimum $12) for ADR holders, plus an annual custody fee of $0.01 to $0.05 per share based on the number of holdings. However, it should be noted that some companies may have delayed dividend arrival due to cross-border process delays. For foreign companies, ADRs are an efficient way to access the U.S. capital market. In 2014, Alibaba listed through Level 3 ADRs, raising $25 billion, setting a record for the world’s largest IPO, and also improving its international market awareness. In addition, ADRs can attract institutional investors such as hedge funds and pension funds, optimizing the company’s shareholder structure. The price of ADRs is affected by both the underlying stocks (denominated in local currency) and the U.S. dollar exchange rate. For example, if the stock price of a European company rises by 10%, but the euro depreciates by 5% against the U.S. dollar, the actual return of ADR holders may shrink to about 4.5%. At the same time, the SEC has strengthened supervision over Chinese concept stocks in recent years, and plans to revise the definition of "Foreign Private Issuer (FPI)" in 2025, requiring more information disclosure, which may increase the company’s compliance costs. In addition to trading commissions, ADR holders also need to bear custody fees (for example, Bank of Communications International charges 0.05% of the end-of-year holding market value, minimum HK$100), dividend withholding taxes, etc. According to the China-U.S. tax treaty, the dividend tax rate for Chinese residents is 10% (30% for non-treaty countries), while capital gains tax is temporarily exempted. For example, if an investor holds 1,000 ADR shares, the annual custody fee may reach $25, and long-term holders need to pay attention to these cumulative costs. Luckin Coffee was delisted by Nasdaq in 2020 due to financial fraud, and its ADRs were transferred to the OTC market for trading. Its stock price fell from a peak of $51.38 to $0.5, and liquidity almost dried up. Such incidents remind investors that even if the company restructures successfully (for example, Luckin completed debt restructuring in 2022), the market recognition of its ADRs may be affected for a long time. Some foreign companies adopt International Financial Reporting Standards (IFRS), which differ from U.S. Generally Accepted Accounting Principles (GAAP). For example, a German company may have financial report data inconsistent with U.S. standards due to the capitalization of R&D expenses, which requires investors to make comparative adjustments on their own. In addition, the SEC requires Level 3 ADR companies to submit 20-F annual reports, whose content complexity is higher than that of domestic companies’ 10-K reports. Geopolitical events may directly impact ADRs. For example, in 2025, the SEC plans to tighten the definition of FPI. If a Chinese concept stock is reclassified as a "domestic issuer", it will need to adjust its governance structure according to U.S. standards, which may trigger stock price fluctuations. Investors need to pay attention to the progress of Sino-U.S. regulatory cooperation, such as the normalization of cross-border audit working paper review. In 2014, Alibaba chose to list on the NYSE through Level 3 ADRs, avoiding the complicated procedures of direct listing. The depositary bank Citigroup issued ADSs (each corresponding to 8 common shares) by depositing the stocks of its Cayman Islands-registered entity. On the first trading day, the stock price rose by 38%, and its market value exceeded $230 billion. As of 2025, its ADRs remain the largest Chinese concept stock by market capitalization, with an average daily trading volume of over 50 million shares. Level 3 ADRs are suitable for enterprises with international influence, but their high financing scale also means higher regulatory scrutiny, requiring continuous compliance with the SEC’s disclosure requirements. In 2020, Luckin Coffee admitted to 2.2 billion yuan of false transactions, and its ADRs plummeted by 75% in a single day, and was eventually delisted by Nasdaq. The SEC initiated delisting proceedings on the grounds of "damaging public interest", and its ADRs were transferred to the Pink Sheets market, with liquidity almost disappearing. Investors obtained $187.5 million in compensation through class-action lawsuits. Although the company resumed operations after restructuring, the price of its ADRs was only 1% of its peak value. This case highlights the legal risks of ADRs: even if the company’s business recovers, the loss of reputation may lead to a long-term shrinkage of its value. In 2025, Macquarie upgraded XPeng Motors’ ADR rating from "Neutral" to "Outperform", with a target price of $24 (a 7.9% increase), mainly based on the improved R&D investment conversion efficiency shown in its quarterly financial report. Unlike ADRs of traditional manufacturing industries, the valuation of tech company ADRs relies more on the speed of technological iteration. XPeng enhanced U.S. investors’ confidence in its long-term competitiveness by releasing ESG reports that meet international standards, which also reflects that the weight of ESG factors in ADR pricing is gradually increasing. As an important tool for cross-border investment, ADRs not only provide foreign companies with a channel to raise U.S. dollar funds, but also open the door to the global market for U.S. investors. However, its value is affected by multiple factors such as exchange rates, regulation and corporate governance. Investors need to focus on the fee structure, tax policies and the compliance of the target company, and select suitable ADR types based on their own risk preferences. For issuers, although Level 3 ADRs can bring a large scale of financing, they need to undertake disclosure obligations equivalent to U.S. domestic companies, so it is necessary to balance the benefits brought by internationalization and compliance costs. © 2021 Meishun (Hong Kong) Management Consulting Co., Ltd. and Meishun (Hangzhou) Management Consulting Co., Ltd. All rights reserved. Meishun Meiyin (Hangzhou) Consulting Management Co., Ltd. is a domestic subsidiary of Hong Kong Meishun Management Consulting Co., Ltd. under the same actual controller. Both companies are managed under the same Chinese framework, complying with the laws of Hong Kong and mainland China.