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Elevator Pitch
UP Fintech Holdings Limited’s stock (NASDAQ:TIGR) is rated as a Hold.
I have a mixed view of TIGR’s future outlook. UP Fintech has done a reasonably good job in adding new funded accounts from markets outside of Mainland China. On the flip side, new market expansion will lead to higher expenses in the near term, and one can’t completely rule out the risk of new regulations or policies being introduced that are negative for cross-border online brokers like TIGR. As such, I choose to assign a Hold rating to UP Fintech.
Company Background
In the company’s press releases, UP Fintech describes itself as “a leading online brokerage” boasting “over 9 million users and 2 million account holders worldwide” on its “Tiger Trade” trading platform.
TIGR first started operating in 2014, and its shares have been listed on Nasdaq since March 2019.
According to its 6-K filing dated November 23, 2022, UP Fintech generated 52%, 37%, and 11% of its top line for the first nine months of this year from commissions, interest-related income, and other revenues, respectively.
TIGR’s Current Share Price Is About Half Of Where It Traded In October Last Year
An October 14, 2021 Seeking Alpha News article cited a Mainland Chinese state-owned media publication The People’s Daily commentary noting that China’s new data privacy regulations are “a challenge to online brokers that provide cross-border trading services to mainland Chinese citizens.” In the same month, Seeking Alpha News reported that a Reuters article made reference to “the Chinese central bank’s” comments that “online brokerages (serving Mainland Chinese clients) that aren’t licensed in China are operating illegally.”
UP Fintech’s shares last traded at $5.15 as of December 1, 2022, which is less than half of TIGR’s $10.42 stock price as of October 1, 2021. In the past 14 months, the price-to-revenue multiple for TIGR has derated from 4.69 times to 3.13 times.
While there has been a broad sell-down in both US and Chinese equity markets in 2022, it is reasonable to assume that regulatory fears were also a major reason for UP Fintech’s poor share price performance and valuation de-rating in the past one year or so.
At its prior Q3 2021 earnings call on November 30, 2021, UP Fintech addressed regulatory concerns by stressing that its “business model is no different than overseas broker servicing domestic (Mainland Chinese) investors” and noting that it has relevant “policies and procedures on personal information protection and data security” in place.
A February 8, 2022 Bloomberg news article highlighted that “a senior Chinese central bank official” referred to “cross-border brokers” as “illegal.” In the last 10 months, there doesn’t seem to have been any further developments on the regulatory front for online cross-border brokerages.
In the next section, I discuss about TIGR’s progress in diversifying away from Mainland Chinese customers as a means of lowering its regulatory risks.
Diversification Will Help To Mitigate Regulatory Risks
UP Fintech revealed at the company’s most recent investor briefing for the third quarter of the current year that Singapore, Australia/New Zealand, and Mainland China contributed approximately 60%, 20%, and 20% of its new funded accounts. In other words, TIGR is doing a decent job in gradually lowering its Chinese client exposure to a reasonably comfortable level in time to come.
In fact, TIGR has made good headway in attracting more customers and funds from specific international markets.
UP Fintech ventured into the Australian market in the first quarter of this year. But the company’s trading mobile application was already ranked No. 1 among the online stock trading apps in Australia by the second quarter of 2022. Also, the percentage of funded accounts from Australia as a proportion of total funded accounts rose significantly from over 10% for Q2 2022 to 20% in Q3 2022.
With respect to the Singapore market, UP Fintech revealed in its Q3 2022 earnings media release that “the average net asset inflows of new (Singapore) clients” grew by more than +20% QoQ to $11,000 in the most recent quarter. TIGR’s introduction of Tiger Vault could have been the driver of higher asset inflows for the Singapore market. UP Fintech referred to Tiger Vault as a “wealth management platform” which assists users to “diversify their portfolio and combine cash management and other investment products” in its third quarter results press release.
All Eyes On Expansion In The Hong Kong Market
TIGR specifically noted in its Q3 2022 earnings release that the company is “ready to onboard (Hong Kong) retail investors in December” this year. This marks a major milestone for UP Fintech’s expansion plans in the Hong Kong market.
In June 2022, UP Fintech outlined its goal of having Hong Kong, the US and Australia account for a quarter of the company’s new funded accounts for this year. This implies that the Hong Kong market has an important role to play in TIGR’s diversification efforts.
But diversification and new market expansion come with costs.
The average CAC or Customer Acquisition Cost on a per-account basis for TIGR increased by around +9% QoQ to $326 in the third quarter of 2022. It is worthy of note that UP Fintech acknowledged at its Q3 2022 earnings call that “CAC might go up (in the quarters ahead) after we start to on-boarding Hong Kong”, as it is “normal to incur more branding expense after entering a new market.”
Closing Thoughts
A Hold rating for UP Fintech is fair in my opinion. TIGR doesn’t warrant a Sell, since its stock price decline has factored in regulatory headwinds to some extent, and the company is working hard to reduce its exposure to customers from Mainland China. But UP Fintech doesn’t deserve a Buy rating either, as regulatory risks for cross-border online brokerages can’t be eliminated, and the company’s expenses in the short term will rise as it steps up its diversification efforts.
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