CITI'S TAKE
Up Fintech (Tiger Broker) reported 2Q24 non-GAAP NP of US$5.2m (-65% q-q/-66% y-y), weak due to US$13.2m one-off provision made for legacy HK stock pledge biz (discontinued in 2023). Mgmt. flagged that troubled exposure has been fully written off in 2Q, despite signed agreement from the client (name undisclosed by TIGR) to fully repay loan by end-2025; the troubled client’s controlling shareholder provided repayment guarantee, which enhances the chance of provision writeback. Operating profit (excl. one-off provision) was strong, +30.9% q-q/+68.2% y-y, thanks to solid trading volume and MFSL expansion in 2Q. TIGR added 48.9k new paying customers in 2Q24 (+69.8% q-q/+68.6% y-y) to bring 1H24 new paying customers to form 52% of mgmt. full-year 2024E guidance of 150k. Looking at 3Q24E, mgmt. sees further strength in trading volume and revenue momentum vs. 2Q. We trim DCF-derived TP to US$5.00 (from US$6.49) after earnings revision. Maintain Buy/High Risk rating.
Key Positives — Number of new paying customers rebounded, up +69.8% q-q/+68.6% y-y to 48.9k in 2Q24, of which, c.65%/15%/10%/10% were from SG/HK/AU&NZ/US vs. nil from Mainland China per CSRC guidance. This brings 1H24 new paying customer numbers to reach 52% of mgmt. guidance for 2024 total new paying customer numbers to reach 150k. Looking forward, mgmt. sees continued strength in new paying customer acquisition in 3Q24E, comparable to 2Q. Hence, mgmt. remained confident to deliver on full year new paying customer of 150k in 2024E. Client asset balance grew strongly, +16.2% QoQ or +US$5.3bn QoQ to US$38.2bn in 2Q24, driven both by decent client asset inflow of US$1.7bn in 2Q24, and mark-to-market gain of c.US$3.6bn in 2Q. For 3Q24E, mgmt. sees pace of client asset inflow to remain strong, despite possible market volatility in Sep due to US election / Fed decision.
Key Positives – Brokerage commission income grow strongly by +22.4% q-q/ +56.6% y-y to reach a three-year high in 2Q24, thanks to solid trading activities across cash equity (trading volume was +17.1% QoQ /+73.5% YoY to US$33.5bn in 2Q), and options (w/ number of options traded at 12.17mn, +12.2% QoQ / +56.9% YoY in 2Q24), more than offsetting the negative from reduced blended commission rate (by trading volume), which was -0.1bp QoQ to 3.5bp in 2Q24. Mgmt. noted that US stock trading account for the vast majority or c.90% of the total trading volume vs. HK stock trading accounts for only c.10%. Net interest income was up +5.1% QoQ/ +16.1% YoY to reach US$33.5mn in 2Q, thanks to decent interest income from strong MFSL balance expansion (up +22.5% QoQ/+65.6% YoY in 2Q24). According to mgmt. c.40%+ of TIGR interest income is sensitive to Fed rate cut, and each 25bp Fed rate cut may lead to c.1% gross revenue hit. Other revenue grew decently, +39.3% QoQ/+31.6% YoY, thanks to increase in IPO distribution income, and still-healthy institutional customer acquisition, with total ESOP clients reaching 579 in 2Q24 (+22 q-q).
Key Negatives — Cost-to-income ratio worsened to 93.2% (+14.8ppt QoQ/ +12.1ppt YoY in 2Q), mainly dragged by one-off provision related to the legacy HK stock pledge biz; but also partly due to increased G&A / marketing expense as % of gross revenue (+1.9ppt/ +0.8ppt QoQ) as TIGR took more pro-active approach in new paying customer acquisition in 2Q24. Notwithstanding, we flag still well-controlled CAC per new paying customer at US$131, -14% q-q/ -19.5% y-y, which is a three-year low last seen in 1Q21.
Updates on key markets — Singapore: New paying customers remained decent in Singapore, accounting for c.65% of new paying customers in 2Q24 (+15ppt q-q). Average assets of Singapore clients continued to grow, reaching US$15k in 2Q24 (+7% q-q). Hong Kong: TIGR launched short-selling and option trading function for HK stocks in Aug 2024 and took more proactive customer acquisition strategy in 2Q24 on bullish investor sentiment. This help boosted new paying customer number in HK to reach c.7k in 2Q24 (up +2.5x q-q). Quality of new customers in HK was solid, with avg client asset at US$15k in 2Q24. Crypto: After obtaining SFC license uplift, TIGR has launched crypto trading biz in HK for professional investors in 1Q24, and for retail investors since Jun 2024. With cheaper-than-peers crypto trading fee rate at c.5bp to entice customers (vs. Futu at c.8bp), mgmt. see potential gross profit margin at 40%-50% (lower vs. Futu at 60%-70%). Given crypto biz remains in early stage of development, mgmt. see priority focusing on growing customer base first, before optimizing on profit margins.
Earnings revisions, new target price of US$5.0 — We trim FY24-26E earnings by 2%-6% to USD44.7mn/USD49.1mn/USD53.6mn, to factor in weaker-than-expected 2Q due to large one-off provision expense. We raised implied WACC to 14% (from 11%) to bake in higher cost of capital given TIGR’s vulnerability to US recession risk. Accordingly, our DCF-derived TP was reduced to US$5.0 (from US$6.49). Maintain Buy/1H rating, as we see vast potential in the international brokerage market longer-term.
