Summary
- TIGR is a high-growth, potentially high-margin business with a mobile-oriented brokerage platform providing services mainly in China and the Southeast Asia region.
- TIGR is in pole position to benefit greatly from the retail trading boom and capture the nascent market for China's offshore online securities.
- However, there are significant business and regulatory risks.
The situation around the recent Chinese crackdown debacle leaves many investors concerned, leading to a massive tech sell-off under further pressure. Chinese tech stocks are aggressively selling off, trading at significant discounts to their Western counterparts.
However, this creates a huge opportunity for investors looking for an asymmetrically attractive high reward trade as the market usually tends to overreact. I believe such is the case for UP Fintech (TIGR), also known as "Tiger Brokers" in Asia.
TIGR is a high growth, online brokerage firm offering comprehensive, low commission brokerage services through its 'mobile first' strategy to better serve and retain clients. Many investors often dub it the "Robinhood Of China." Despite growing over 136% YoY in 2020, it is currently only trading at 8.9x forward EV/Gross Profit multiple. At $17.71 per share, TIGR is trading at a $2.5 billion enterprise value.
In this article, I will dive into analyzing the business and why I believe investors should consider buying the dip. I will also cover the major business and regulatory risks that come with investing in Chinese firms such as TIGR.
Market Opportunity
There are already a number of mobile-oriented brokerages as the industry continues to shift deeper into the digital age. With more Millennials and Gen-Z accumulating wealth and investing, companies like Robinhood (HOOD), Interactive Brokers (IBKR), and Square (SQ) have built platforms to allow investors to manage their portfolios through a beginner-friendly user interface. This trend is further driven by the continuing growth in household income for people in China. This is why companies like Futu Holdings (FUTU) and TIGR have seen massive growth in users and revenue.
Based on this Credit Suisse global wealth report, the total household income in 2019 was over USD $77 trillion. However, just like the rest of the world, the Chinese economy was also severely affected by the COVID-19 pandemic, although it has mostly recovered to pre-pandemic levels. As of now, much of the nascent Chinese market is mostly untapped.
People are also living more frugally, cutting down unnecessary spending throughout the COVID-19 crisis. Further fueled by COVID-19 grants and unemployment support grants, people now have more savings and higher incomes than they ever did before the pandemic.
Chart of personal savings in the United States.
With the amount of information easily accessible to anyone nowadays, people feel more encouraged to invest and trade instead of having their savings sitting in their bank account accumulating low-interest rates.
So what will people do with all these savings?
Historically, Chinese investors have allocated their assets differently from Western counterparts, mainly investing in real estate and bank deposits. However, I believe this is due to strict regulations in the Chinese stock market and not because Chinese investors have no interest in overseas markets. Hence, these habits could change with more access to overseas markets.
Brokers like FUTU and TIGR enable them to access overseas markets (i.e., NYSE, NASDAQ, SGX).
According to a 2018 Oliver Wyman report, the market for China's offshore online retail securities is expected to reach over $1.35 trillion in 2022. Based on the retail trading boom we have witnessed in 2020 and the beginning of 2021, this may be a conservative projection.
Demographics
Since TIGR is focused on a mobile-oriented user experience strategy, a large percentage of its user base is relatively young. Many have compared Tiger to similar platforms in the west like Robinhood which has over 18 million users with an average age of 31.
According to its 2021 Q1 filing, Tiger has a user base of over 1.4 million total registered accounts and over 376,000 are funded accounts. Although TIGR's main markets are in mainland China and Hong Kong, they have recently expanded abroad into a total of 6 countries. (Singapore, Hong Kong, Australia, New Zealand, U.S, and China)
Over 70% of their users are under the age of 35 and over 80% of users make over $40k USD. I believe there is much room to grow, especially in the South East Asian region offering a lot of potential for market expansion.
Business Model and Financials
Compared to other online brokers such as Robinhood, I much prefer the business model of TIGR. They generated US$138.5 million in revenue in 2020, representing a 136% growth year over year. The breakdown is quite simple:
- Commissions from trading volume and commission rates (56%)
- Financing service fees (5%)
- Interest income from margin lending (23%)
- Other revenue & IPO distribution services - Market data service & employee share option plan ("ESOP") management services, etc. (16%)
As of FY20, the main revenue drivers are brokerage commissions and interest income from margin lending. Over the past three years, the reliance on commission revenue has been decreasing as a result of diversification.
Operating costs include: execution & clearing, market data, employee compensation, marketing and branding, and G&A costs. This corporate structure has the potential of being a high-margin business like other online brokerages.
In its most recent earnings call, Tiger announced that they are currently applying for licenses to offer cryptocurrency trading for clients outside of China. This is a highly lucrative business as we all know that cryptocurrency trading volume is typically very high. If they are successful, we can see another stream of revenue added to propel their revenue growth even further.
I would like to see them grow their IPO distribution service and ESOP management service segment and reduce the reliance on commission revenues. If they are able to diversify their products and services further, it reduces the risk of overreliance on commissions as the main driver of revenues as it is directly correlated with fluctuations in trading activity.
Looking at their Q1-2021 report, TIGR has grown its revenues by over 72% QoQ and 255% YoY. I genuinely don't think I can find any other stock at this valuation offering the same growth.
Top-Line Growth
TIGR has experienced extreme top-line growth in 2020 and I expect the trend to continue going forward as they continue expanding abroad and penetrating the South East Asian region. They have recently achieved profitability in 2020 and if they are able to sustain profitability and grow margins in the future, TIGR has the potential of being a high margin business like other online brokerage firms.
In the first quarter of 2021, TIGR added over 117,000 newly funded accounts to a total of 376,000 funded accounts, representing a 180% growth YoY and 45% growth QoQ.
With over 1.4 million total registered users on its platform, only 27% are funded accounts. I believe the large gap between the total number of registered users and funded accounts could illustrate huge demand for access to overseas markets, (i.e., U.S. and HK markets) but a delay in Chinese users pulling the trigger on investing.
I expect TIGR to continue penetrating the nascent Chinese investing market and growing its user base while converting existing registered users into paying clients in the future.
The risk/reward profile for TIGR is simply too attractive to ignore. With phenomenal growth and rock bottom valuations, TIGR could potentially offer significant upside if you strip out the geopolitical risks. Running it through a DCF I got a fair value of around $28 per share with an implied upside of 59% as my base case with a 12% discount rate.
Quick Valuation
I will provide a quick comparative valuation between HOOD, FUTU, and TIGR. The table below shows the respective growth in funded accounts QoQ (Q1 2021), EV/2021 Revenue, and EV/2021 Gross Profit of other high growth brokerage companies. Note that the forward figures are calculated using Q1 2021 run rate estimates.
Although Robinhood is much larger with over 18 million paying users, TIGR's client base holds an average balance of over $56,000 USD in assets per user compared to Robinhood's $4500, implying stickiness and users' trust in TIGR's platform. TIGR's small size leaves it with massive potential and plenty of room to grow. Even if they are only able to capture a fraction of the nascent Chinese securities market, I believe there is so much upside given the size of China's online securities market.
The Bottom Line
As much as there is a ton of upside, there is also a lot of risks and we have to take into account the unique regulatory risks that come with investing in Chinese firms such as TIGR. For a company growing >100% Y.o.Y consecutively with strong margins, and still only trading at 8.9x forward Gross Profit, I believe it is worth taking a deeper look at.
At $17.70, TIGR is trading at a $2.5 billion valuation. Assuming their revenue growth rate decreases steadily from 130% to 16% over the next 6 years, this implies a 10.5x in revenue and 48% CAGR over this period. I remain bullish on their continued growth and TAM potential, especially in the nascent Chinese and South East Asian markets. Hence, I believe that TIGR is undervalued at $17.70, and I'm buying into a high-growth business with strong margins at a good price with a margin of safety.
Comments
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