CITI'S TAKE
Up Fintech (Tiger Broker) reported 3Q22 non-GAAP net profit of USD6.63mn(+91.3% q-q / 26.2% y-y), above our expectation, primarily due to a larger than-expected net interest income benefit from global rate hikes. Operating profit (excl. share-based compensation) rebounded strongly to USD7.1mn(+190% q-q /+46% y-y) supported by lower S&M and G&A expense. Mgmt. reiterated its confidence in meeting new paying customer guidance of 100k for 2022 of which 80.7k (or c.81% of full-year target) has been achieved in9M22. We update our DCF-derived TP to US$7.67 (from US$7.55) on our increased 2022 earnings estimate to US$6.5mn (from US$0.4mn) and raise our 2023-2E earnings estimates by 10-19% to factor in the rate hike benefit.
Key Positives
Net interest income grew 82.1% q-q/ 42.2% y-y to US$22.6mn, mainly supported by higher interest rates charged by the margin finance business in line with the US rate hikes, which more than offsets the lower MFSL balance (-3.6%q-q amid turbulent equity markets) and higher interest expense (+22% q-q givenTIGR still needs time to gradually replace high-cost funding from IBKR); Execution and clearing expenses fell 16% q-q/-66% y-y to US$3.22mn (acct. for 13.1% of gross commission income, down -0.5ppt q-q/ -15.2 ppt y-y), mainly thanks to rampup in US self-clearing, with c.100% of US cash equities & options self-cleared (vs.80% in 2Q), lowering the cost of US cash equities & option clearing to c.3% of commission income (vs. 5% in 2Q22). Cost-to-income ratio fell -12.1ppt q-q/ -3.3ppty-y to 92%, primarily due to lower general and administration expense as % of gross profit (-2.1ppt q-q/-3.3ppt to 7.3%, on tight cost control) and lower sales and marketing expense as % of gross profit (-2.7ppt q-q/ -8.2ppt y-y to 15.4%, due to prudent client acquisition strategy amid equity market weakness). Though CAC per new paying customer increased 9% q-q to US$326, the increase was mainly driven by higher brand marketing expense in SG & AUS, stripping out which, CAC was sequentially lower vs. 2Q (e.g. the adjusted CAC in SG was US$175 down -12.5%q-q vs. US$200 in 2Q22). Continued below.
Key 3Q22 Negatives
Gross commission income was down -13.2% q-q/ -26.9%y-y, due to both lower total trading volume (-9% q-q to US$78bn, driven by lower stock trading volume of US$23bn, down -23.5% q-q vs. options & futures trading was flattish q-q at US$54bn) and lower commission rate of 3.4bp (-0.2bp q-q); No. of new paying customers fell -18.6% q-q / -72.6% y-y to 22.7k (a low since 1Q20), of which c.20%/60%/20% were from China/ SG/ US, AUS and NZ markets by geographical breakdown (broadly the same mix vs. 2Q22). In view of total new paying customers has already 80.7k in 9M22, mgmt. iterated confidence to meet the2022 target of 100k, implying new paying customers in 4Q22 could be c.20k (-12%q-q). Quarterly paying client retention rate remained high at 98% flattish q-q. Total paying customers reached 754.1mn (up +23.2% y-y), of which c.50%/40%/10% are from SG/China/ US, AUS and NZ markets (broadly unchanged vs. 2Q22); Client asset balance fell by -12.8% or -US$1.9bn q-q to US$13bn (a wider decline vs -2%/-US$300mn q-q in 2Q22) primarily dragged by mark-to-market loss in institutional clients asset balance (c.35% of the AUM in 3Q, with concentrated position in Chinese ADR/ HK shares and limited trading activities), while retail client (c.65% of the AUM) suffered milder asset balance decline, buffered by still-resilient net asset inflow of >US$700mn (albeit lower vs. US$1.5bn in 2Q). Other revenue fell -57% qq / -45% y-y, mainly dragged down by lower IBD fee rates on the 11 IPOsparticipated in 3Q22, while institutional customer acquisition remained healthy with total ESOP clients reaching 393 (+29 new ESOP clients in 3Q vs. +26 in 2Q).
Updates on key markets—Singapore: The quality of new paying customers continued to improve in 3Q22, with initial deposit growing to reach >US$11k in3Q22 (vs. US$9k/ US$7.5k in 2Q/1Q22) and still-resilient deposit inflow across cohorts of existing SG customers every quarter.Hong Kong: TIGR has completed market infrastructure building and will officially launch retail customer acquisition in Dec 2022. In view of still-turbulent market condition, mgmt. guided to maintain prudent customer acquisition strategy in 4Q22, with slower pace of HK customer acquisition at the start. For 2023, mgmt. targets to reach 100% self-clearing for HK shares trading by end-2023, which we estimate could bring c.US$5mn quarterly cost savings from lower interest expense and clearing cost in 2H23.
Fed rate hike benefit: TIGR may enjoy an additional US$1mn interest income for every 50bp Fed rate hike by our estimate, benefiting from the interest income from clients’ idle funding.
4Q22 outlook: New paying client numbers may continue to fall q-q given prudent customer acquisition strategy amid market volatility; Client assets may fall by lowsingle digits q-q in 4Q22 with possible mark-to-market depreciation buffered by positive net asset inflow; Blended commission rate in 4Q22 should remain broadly stable vs. 3Q given stable cash equity commission rate.
Earnings revision and new target price of US$7.67 — Given 3Q22 results came in better than our expectation, we revise up non-GAAP earnings forecast for FY22 earnings to US$6.5mn (from US$0.4mn previously) and raise our FY23/24/25 earnings estimates by 10-19% to US$30.1mn/ US$38.4mn/ US$60.5mn by factoring in interest income benefit from the Fed rate hike. Accordingly, we fine-tune our DCF-derived TP to US$7.67 (from US$7.55). Reiterate our Buy/1H rating on the vast potential we see in the international brokerage market in the long-term and lower regulatory risk.
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$7.67 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 international brokerage market. Our DCF assumptions include: [1] Free cash flow (FCF) forecast of 14% CAGRover 2021-30E; [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 40x 23E 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.