UP Fintech Holding Limited (TIGR), also known as “Tiger Brokers”, is a China-based online brokerage with subsidiaries in several countries. This year’s pandemic has led to a boom for the industry with investors seeking to profit from the historic levels of volatility and now benefiting from the strong bull market in stocks. Indeed, shares of TIGR are up nearly 55% in 2020 supported by impressive growth with its revenues and client base more than doubling compared to last year. The company continues to innovate with new features to the platform while expanding outside its core China market. We are bullish on the stock which has more upside going forward supported by climbing earnings and overall solid fundamentals.
TIGR Q3 Earnings Recap
Up Fintech reported its Q3 earnings on November 25th with non-GAAP EPS of $0.04 and GAAP EPS of $0.03. Total revenues in the quarter reached $38 million, up 148.2% year-over-year. The strong top-line figure drove a higher adjusted operating margin of 23.4%, compared to 8.5% in the same period last year. The company benefited from a relatively subdued increase in operating costs and expenses which climbed below the revenue growth rate.
(source: Company IR)
The story here was strong operating momentum with the company reaching a milestone of opening its 1 millionth client account in October. Through the quarter-end, the number of customers with deposits was up 111% y/y. Favorably, reading between the lines, the number of customers with deposits or funded accounts as a percentage of total customer accounts has increased to 22% from 20% in Q2 suggesting users signing up to the platform are converting at a higher rate. Management highlighted that total account balances reaching $10.9 billion, up 188% y/y, and above the rate of customer growth, implies investors are allocating more of their assets into Tiger Brokers.
(source: Company IR/ annotation by BOOX Research)
The company now has licensed operations in the U.S., Singapore, New Zealand, and Australia highlighting a global expansion strategy. Clients outside of China now represent nearly 20% of new funded accounts. The company thinks that figure can reach 50% over the next year or so. An ongoing effort is to capture institutional clients transitioning from its legacy “pure discount” brokerage model. Vice President of Strategy, Clark Soucy made the following comments in the earnings conference call projecting an optimistic outlook.
And the beauty of international expansion is the funding our conversion rate will be much higher and also we can offer very differentiated service versus the local brokers. For example, our commission rates will be much lower than the existing local players. And we help the local people not that only trade in their local stocks and also we help them to trade in Hong Kong and the U.S. equities. So we are very bullish about our international expansion strategy. We just started international expansion pretty much in the beginning of this year and we are seeing very promising results. So, we are very confident in the next 12 months to 24 months. Our international funding accounts will account for more than 50% of our deal paying clients.
It’s worth noting that Up Fintech also includes an investment banking segment that helps Chinese companies raise capital in the U.S. and Hong Kong. The company participated in eight listings in Q3. Other growth opportunities include asset management services along with management of company employee stock options plans “ESOP management”.
In terms of the balance sheet, Up Fintech ended the quarter with $86.9 million in cash and equivalents against zero long-term financial debt. A financial current ratio of 1.3x implies an overall solid liquidity position. We view the balance sheet as strong, supporting the overall investment profile of the company.
Analysis and Forward-Looking Commentary
Together with the impressive operating trends and rising earnings, we are encouraged by the significant growth opportunities. The attraction here is that the Tiger Brokers brand is a leader in China that benefits from a strong brand awareness among Chinese investors living abroad. This allows for a natural addressable market when the company opens licensed brokerage subsidiaries in new countries. While China remains the core market, the steps for a broader internationalization can represent the next stage of growth.
(source: Tiger Brokers)
Up Fintech maintains partnerships with larger financial institutions which adds credibility to the platform infrastructure. Currently, the company relies on Interactive Brokers Group (IBKR) for the majority of its execution, clearing, and trade settlement. That being said, Up Fintech is moving towards the ability to self-clear U.S. cash equities which can support margins going forward.
In terms of valuation, the metrics we’re looking at suggesting TIGR is trading at a price to sales multiple of 6.8x and price to earnings ratio of 95x. While these measures represent a high growth premium, keep in mind that this is in the context of 148% y/y revenue growth in the last quarter in a profitable business. While management does not offer official earnings guidance, a single published Wall Street estimate for the company to reach EPS of $0.10 this year and $0.22 in fiscal 2021 implies a more reasonable forward P/E of 56x and 1-year forward P/E of 25x.
The big question is if the company will be able to maintain its current growth momentum and how much of the trends this year were simply a temporary boost based on the pandemic. While the online brokerage business is highly competitive with several discount options for investors, the advantage in Up Fintech is its niche focus on global Chinese investors and access to trade in several international equity markets. We sense that the customers acquired this year are likely to remain loyal to the platform as long as the service quality and technical features can match expectations.
The following points summarize the bullish case for the stock:
- Exceptional growth based on new clients to the global brokerage platform.
- Aggregate accounts balance growing faster than the number of customers suggests investors are allocating more equity to the platform.
- International expansion into new countries while offering trading into more foreign equity supports growth.
- Efforts to self-clear U.S. cash equities can help reduce costs going forward.
- Services business including ESOP management, investment banking, and asset management represent high-margin services.
- Ongoing profitability and a solid balance sheet.
The Big Picture
Overall, we are bullish and rate shares of TIGR as a buy with a price target of $7.50 for the year ahead. Notably, our price target representing 40% higher was already reached back in July. The stock has sold off following the last earnings report and we think this dip offers a good entry point with significant upside potential. The recent weakness in shares can be related to normal volatility given the high-growth profile of the company and profit-taking as the underlying outlook remains positive. To the downside, we think $4.50 can represent a strong level of technical support.
Disclosure: I am/we are long TIGR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.