Why UP Fintech (TIGR) Stock Just Plunged By Nearly 30%

After falling by nearly 10%, Futu Holdings (FUTU) fell by another 31.0% on Dec. 30, 2022. News that China authorities would restrict UP Fintech Holding (NASDAQ:TIGR) and Futu sent shares sharply lower.

Why did authorities ask the two firms to stop taking new onshore China investors? For years, the firms operated a cross-border securities tradition business without the commission’s approval.

Having already covered Fintech recently, TIGR stock’s 28.5% drop will interest readers.

Statement From China Securities Regulatory Commission

On Dec. 30, 2022, the China Commission, per Google’s translation, said that UP Fintech did not have its permission to operate the cross-border securities trading businesses. This constituted an illegal business that contravenes its relevant laws and regulation.

A year before that on Oct. 15, 2021, the CSRC communicated its view on the non-compliance through the media.

The following month, on Nov. 11, 2021, the CSRC conducted regulatory interviews with the two firms. As a result, the regulator would rectify the violations in two ways. First, it will prohibit new account openings and solicitation of domestic investors.

Second, it will let existing domestic investors continue with transactions. However, foreign institutions may not accept incremental funds.

UP Fintech’s Trading Range Tested

TIGR stock had already collapsed from its all-time highs set in early 2021. Last year, the stock managed to form a trading range between $3.20 to around $5.00. Speculators bet that the Chinese would ease unrelated regulatory restrictions on Dec. 8, 2022. They inferred that when China abruptly ended the Dynamic Zero COVID policy, the government would allow UP Fintech to continue its business.

UP Fintech said that it would comply with the relevant laws and regulations. It will not enroll new onshore customers. The company said that the regulations will not have an impact on its business outside of the mainland.

Customer Acquisitions in Q3 2022

On its conference call, Up Fintech, also known as Tiger Brokers, said the business added new, quality customers. Its clients in Singapore contributed to an average net asset inflow of US$11,000. Investors concluded that the net asset inflow increase from $9,000 in Q2 validated Tiger’s healthy business model.

The company reported that its continued research and development spending improved its efficiency. For example, self-clearing resulted in a clearing cost as a percentage of trading commission falling to 13%.

Tiger highlighted the strength of its risk control and self-clearing capabilities would benefit its retail investors. Furthermore, wealth management customers would get better service from its newly launched Tiger Vault. They could diversify their portfolio while combining their cash management needs with other investment products.

Multiple Risks

As discussed above, the regulatory overhang is a major risk for Tiger’s business model. These uncertainties will distract it from managing the slowdown in securities trading. The interest rate hike cycle did not peak yet. The increase in borrowing costs will weaken the underwriting business. The tight liquidity will weigh on Tiger’s revenue potential on its existing client base.

Tiger will need to pause all marketing efforts related to newly funded account acquisitions that violate regulations. It will severely curtail the company’s expansion plans. This will give competitors a chance to take more of the large, total addressable market.

To sustain growth in its business outside of mainland China, Tiger may need to increase the amount it spends per active customer.

This is an uphill battle. 20% of the funded accounts in the third quarter came from mainland China.

TIGR Stock Fair Value

TIGR stock fell by 28.5%, more than the 20% of funded account growth from the mainland. While this might suggest the market oversold shares, bears are firmly betting against Tiger.

The short interest is 14.42%.

Investors might rely on Tiger’s mixed quant score to support the case to buy shares. The stock has a fair valuation score and a growth score of B+.

Unfortunately, TIGR stock’s profit potential depends almost entirely on Chinese regulators. Investors should not rely on the above grades to gauge the company’s prospects.

Your Takeaway

Bears are betting heavily against both Futu Holdings and UP Fintech. The short interest is 1 4.42% on TIGR stock and 16.37% on FUTU stock.

China’s harsh regulations against Tiger will hurt its revenue and profitability prospects. The company cannot invest in the business to foster client growth. This uncertainty will hurt the stock this year.

The bear market is punishing companies with any regulatory risks. As a result, investors should avoid TIGR stock.