UP Fintech Stock: A Mixed View (NASDAQ:TIGR)

Elevator Pitch

UP Fintech Holdings Limited’s share (NASDAQ:TIGR) is considered a hold.

I have a mixed view of TIGR’s future prospects. UP Fintech has done a reasonably good job of adding new funded accounts from markets outside Mainland China. On the flip side, new market expansion will lead to higher expenses in the short term, and one cannot completely rule out the risk of new regulations or guidelines being introduced that are negative for cross-border online brokers such as TIGR. As such, I choose to assign a Hold rating to UP Fintech.

Business background

In the company’s press releases, UP Fintech describes itself as “a leading online brokerage house” with “over 9 million users and 2 million account holders worldwide” on its “Tiger Trade” trading platform.

TIGR started its operations in 2014, and the 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 income, respectively. .

TIGR’s current share price is about half of where it was trading last October

A 14 October 2021 Looking for Alpha News the article cited a state-owned mainland Chinese media publication Folkets Dagblad commentary noting that China’s new privacy regulations are “a challenge for online brokers offering cross-border trading services to mainland Chinese citizens.” In the same month, Looking for Alpha News reported that a Reuters the article referred to “the Chinese central bank’s” comments that “online brokerages (serving mainland Chinese clients) that are not 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 share price as of October 1, 2021. Over the past 14 months, the price-to-earnings multiple for TIGR has decreased from 4.69 times to 3.13 times.

While there has been a broad sell-off in both US and Chinese stock markets in 2022, it is reasonable to assume that regulatory fears were also a major factor in UP Fintech’s poor share price performance and decline in value over the past year or so.

On its previous Q3 2021 earnings call on November 30, 2021, UP Fintech addressed regulatory concerns by emphasizing that its “business model is no different from foreign brokers serving domestic (Mainland Chinese) investors” and noted that they have relevant “guidelines and procedures for personal data 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.” During the last 10 months, there does not appear to have been any further development on the regulatory front for cross-border online brokerages.

In the next section, I discuss TIGR’s progress in diversifying away from mainland Chinese clients as a means of reducing regulatory risks.

Diversification will help reduce regulatory risks

UP Fintech revealed at the company’s latest 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 the new funded accounts. In other words, TIGR is doing a decent job of gradually lowering its exposure to Chinese customers to a reasonably comfortable level going forward.

In fact, TIGR has made good progress in attracting more clients 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 #1 among online stock trading apps in Australia by Q2 2022. Also, the percentage of funded accounts from Australia as a share of total funded accounts rose significantly from over 10% for Q2 2022 to 20% in Q3 2022.

Regarding the Singapore market, UP Fintech revealed in its Q3 2022 media release that “average net asset inflows of new (Singapore) clients” grew by more than +20% QoQ to $11,000 in the latest quarter. TIGR’s introduction of Tiger Vault could have been the driver of higher asset inflows for the Singapore market. UP Fintech touted Tiger Vault as a “wealth management platform” that helps users “diversify their portfolio and combine cash management and other investment products” in its Q3 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 an important milestone for UP Fintech’s expansion plans in the Hong Kong market.

In June 2022, UP Fintech outlined its goal to have Hong Kong, the US and Australia account for a quarter of the company’s new funded accounts for this year. This means 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.

Average CAC or customer acquisition cost per account for TIGR increased by around +9% QoQ to $326 in Q3 2022. It is worth noting that UP Fintech acknowledged at its Q3 2022 earnings call that “CAC may go up (in the quarters ahead) after that we are starting to embark in Hong Kong, as it is “normal to incur more branding expenses after entering a new market.”

Final thoughts

A Hold rating for UP Fintech is fair in my opinion. TIGR does not guarantee a sale, as the share price drop has to some extent taken into account regulatory headwinds, and the company is working hard to reduce its exposure to customers from Mainland China. But UP Fintech does not deserve a Buy rating either, as regulatory risks for cross-border online brokers cannot be eliminated, and the company’s near-term expenses will rise as it steps up diversification efforts.