This report is from Citi Research.
CITI'S TAKE
Up Fintech (Tiger Broker) reported 4Q23 non-GAAP net profit of USD1.06mn (-93% q-q/-77% y-y), bringing 2023 non-GAAP net profit to USD42.7mn, which is c.5% below our expectation. Weak 4Q23 earnings were mainly dragged by trading volume shrinkage and a one-off FOREX loss of USD7mn due to USD depreciation in 4Q23 (vs. a FOREX gain of USD2mn in 3Q23). Operating profit (excl. share-based compensation) fell -64% q-q/ -51% y-y to USD4.4mn, due to a seasonal increase in OPEX in 4Q23, as certain professional services fees are typically booked in 4Q of each year. TIGR added 39.1k new paying customers in 4Q23, sending 2023 new paying customers to 123.1k, exceeding mgmt. guidance of 100k by 23.1%. TIGR guided new paying customers of 150k in 2024E (+50% y-y). We trim DCF derived TP to US$6.22 (from US$8.01) after earnings revision. Maintain Buy/High Risk rating.
Key Positives — The number of new paying customers surprised on the upside at +59% QoQ/+43% YoY to 39.1k, with 60%/20%/10%/10% from SG/US/AU&NZ/HK vs. nil from Mainland China per CSRC guidance. This brings 2023 total new paying customer numbers to 123.1k, which exceeded both mgmt. target of 100k and Citi expectation at c.110k. The strong new paying customer growth in 4Q23 was mainly backed by TIGR’s expanded customer acquisition initiatives via online channels. Total number of paying customers grew modestly, +4.5% QoQ/+15.8% YoY, to reach 904.6k in 4Q23, with c.55%/35%/10% based in SG/CN/other markets. For 2024E, mgmt. guided for new paying customer number to reach 150k (+50% y-y), of which 60%/15%/15%/10% are expected to come from SG/US/AU&NZ/HK. Client asset balance surged, +62.1% QoQ or + US$11.7bn QoQ to US$30.6bn in 4Q23, mainly driven by strong asset inflow of US$8.2bn in 4Q23 (much stronger vs.+US$1.6bn QoQ in 3Q23), and mark-to-market gain of c.US$3.5bn in 4Q (thanks to rally of NASDAQ shares in 4Q). Mgmt flagged that the bulk of net asset inflow in 4Q23 was from institutional investors, who contributed strongly to client asset growth but made limited contribution to trading volume/brokerage commission income as they are mostly PEVC funds that had little trading velocity. (Continued on page 2).
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Key Negatives — Brokerage commission income was under pressure, -5.3% QoQ in 4Q23, mainly due to weak trading activities across cash equity (trading volume was +-3.6% QoQ to US$19.7bn in 4Q), and options (with number of options traded at 8.04mn, -1.2% QoQ in 4Q23), more than offsetting the positive from increased cash equity commission rate (by trading volume), which increased +0.4bp QoQ to 6.5bp in 4Q23 (due to TIGR charged US brokerage commission based on number of stock traded; with reduced trading velocity on “Magnificent 7” in 4Q, the decline in trading volume had outpaced the number of stock traded, leading to a sequential increase in the implied commission rate by trading volume in 4Q). Net interest income fell QoQ to reach US$27.1mn in 4Q, dragged by NIM compression to 2.74% by our estimate in 4Q23 (-38bp QoQ), mainly due to catching up of funding cost increase after Fed interest rate hike, which more than offset the positive from decent interest income and expanded MFSL balance (+20% QoQ in 4Q23). Mgmt. noted c.30% of interest income is derived from interest income from idle cash, while MFSL biz continue to account for the bulk or 70% of the total interest income in 4Q23. Other revenue fell -8.5% QoQ/-15.6% YoY, mainly due to a decrease in IPO distribution income, despite still-healthy institutional customer acquisition, with total ESOP clients reaching 535 in 4Q23 (+30 new ESOP clients in 4Q23 vs. +27 in 3Q). Cost-to-income ratio increased notably to 97.2% (+13.8ppt QoQ/+8.1ppt YoY in 4Q), due to increased compensation/G&A/market data expense as % of gross profit (+4.5ppt/+4.3ppt/+2.9ppt QoQ) as TIGR steadily builds up global headcount to support global biz expansion and increased professional service fees in 4Q (eg, legal expert consulting fee for potential crypto biz launch). Of comfort, we note CAC per new paying customer fell -29.4% QoQ to USD148 in 4Q23 (a two-year low) thanks to TIGR’s expanded online customer acquisition initiatives. By region, CAC in SG/AU&NZ/HK amounted to c.USD150/c.USD350/c.USD300 by our estimate, while CAC for new online customer acquisition channel is low at c.USD50.
Updates on key markets — Mainland China: TIGR still recorded net asset inflow from mainland institutional customers in 4Q23 (as permitted by CSRC), which kept mainland clients’ total asset stable to account for c.40%-45% of TIGR’s overall client asset balance in 4Q (excluding FD account balance, which is distorted by institutional asset inflow). Singapore: New paying customers remained strong in Singapore, accounting for 60% of new paying customers in 4Q23 (+5ppt q-q), thanks to expanded online customer acquisition initiatives in the region. The average assets of Singapore clients continued to grow, up +10.5% QoQ to US$21k in 4Q23 (albeit still lower vs. avg client assets of US$30k+ in China in 4Q, indicating further room for growth) with steady net asset inflow from existing cohorts of clients more than offsetting mark-to-market losses in 3Q. Hong Kong: TIGR maintained conservative customer acquisition strategy in HK, with sales & marketing expense focused on local brand building instead of aggressive customer acquisition. Hence, new paying customers growth in HK remained modest (to account for c.10% of new paying customers in 4Q23, -5ppt QoQ). Mgmt. guided it would continue to exercise prudence in retail customer acquisition in HK and to remain mindful of the relatively high CAC in HK (at c.USD300 in 4Q higher vs. TIGR avg CAC at USD148).
Earnings revisions, new target price of US$6.22 — Given a weaker-than-expected 4Q23 result, we trim FY24/25E earnings by -18%/-24% to USD43.0mn/USD46.6mn and introduce FY26 earnings forecast of USD52.2mn. Accordingly, we update our DCF-derived TP to US$6.22 (from US$8.01). Maintain Buy/1H rating, as we see vast potential in the international brokerage market longer-term.
UP Fintech
Company description
Up Fintech, commonly known as Tiger Brokers, started business with the launch of US stock brokerage and margin financing services, which targeted onshore Chinese investors in August 2015, and has grown to become the largest online broker focusing on the Chinese. By US securities trading volume, it had a 33.7% market share in 2018. The company offers brokerage services in various markets, including the US, HK, China A-share and the UK, and various innovative services such as investor community, US IPO subscription for retail investors, and one-stop incubation services for institutional clients.
Investment strategy
We rate Tiger Brokers as Buy/High Risk (1H). It has clear market leadership and a solid foundation in the US securities brokerage business for Chinese investors, thanks to its comprehensive product offerings and strong technology knowhow. Tiger’s comprehensive license portfolio lays a solid foundation for its global expansion plan, which could open up a new driver for growth, offsetting the slowing growth from China onshore investors amid tightening capital control. Meanwhile, global expansion remains at an early stage, and near-term earnings risk persists given high market volatility.
Valuation
We value Tiger shares at US$6.22 based on a discounted cash flow (DCF) valuation in light of the company's near-term earning volatility and our view of its still-significant long-term potential in the international brokerage market. Our DCF assumptions include: [1] Free cash flow (FCF) forecast of 15% CAGR over 2023-30E; [2] WACC of 11.1%, based on a risk-free rate of 2%, an equity risk premium of 7.4%, and beta of 1.3x; and [3] Terminal growth rate of 5%. Our target price is equivalent to 23.8x 24E P/E.
Risks
We rate Tiger shares High Risk based on our quant model, which is driven by share-price volatility. Key downside risks that could prevent the stock from reaching our target price include: 1) lower-than-expected brokerage commission rates amid intensifying competition; 2) worse-than-expected execution in overseas expansion; 3) slower-than-expected customer asset growth if Chinese regulators further tighten capital controls; 4) change or termination of partnership with Interactive Brokers would negatively impact Tiger’s business operation and profitability; and 5) worse-than-expected market performance would hurt the company’s brokerage commission income, interest income growth, and potentially result in client loss.
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