UP Fintech: More Clarity Is Needed

Elevator Pitch

I continue to have a Hold investment rating assigned to UP Fintech Holding Limited (NASDAQ:TIGR) shares.

In my prior write-up for UP Fintech published on April 3, 2023, I outlined my views on why I thought that it wasn't the right time to upgrade TIGR stock to a Buy. Since my earlier article was written, UP Fintech's shares have pulled back by -12.4% (source: Seeking Alpha price data) as opposed to a +8.0% rise for the S&P 500 during the same time period.

I make no changes to my existing Hold rating for TIGR. The worst case scenario for UP Fintech is that the Chinese regulators change their minds in future and don't allow the company to serve Mainland Chinese clients in the future. Also, TIGR's efforts to expand in Hong Kong have yet to pay off in the form of a substantial increase in newly funded accounts from this market. Given the lack of clarity on regulators' stance and UP Fintech's geographical expansion, I still rate TIGR as a Hold.

Spotlight On App Removal From Mainland China

The removal of UP Fintech's application from China is the most significant development for the company in the three months following the publication of my earlier article.

In mid-May this year, UP Fintech issued a 6-K filing revealing that the company "will remove its app 'Tiger International' from the Chinese mainland application market" to meet the "requirements of the China Securities Regulatory Commission."

On the surface, it seems that this recent development shouldn't have a significant impact on TIGR, considering the fact that the company has already suspended new account openings for Mainland Chinese investors since the end of last year.

Also, UP Fintech disclosed at its Q1 2023 results call in May that the Chinese regulatory authorities have given the go-ahead for "onshore users who can prove that they already opened brokerage account offshore" to "be considered as existing clients." Furthermore, TIGR revealed at the company's most recent quarterly earnings briefing that China's regulators are giving TIGR the right to accept "onshore users who lease or work overseas to open new accounts" with the company. In summary, it appears that the regulatory headwinds for cross-border brokerage firms like UP Fintech have eased to some extent.

But UP Fintech's shares still dropped by -11.1% on May 18, 2023, following TIGR's announcement, and I think that the negative market reaction is justified based on two key factors.

Firstly, there is always a possibility that regulators in China do a turnaround and decide that UP Fintech and its cross-border brokerage peers can't serve its existing clients based in Mainland China.

Secondly, some of TIGR's existing Mainland Chinese customers could be tempted to transfer part or all of their assets to the brokerage arms of Hong Kong banks (which aren't considered cross-border brokers like UP Fintech) in light of regulatory uncertainty for cross-border brokerages.

In a nutshell, there are still meaningful downside risks for UP Fintech's future financial performance relating to lower than expected revenue contribution from the company's existing customers from Mainland China.

User And Asset Mix For TIGR Isn't Optimal Yet

UP Fintech doesn't disclose the Mainland Chinese clients' contribution to the company's overall business mix. But TIGR's customers based in Mainland China are estimated to contribute two-thirds of the company's AUM (Assets Under Management) and almost half of its paying user base last year as per third-party projections. These numbers are based on Daiwa Securities' research detailed in a May 19, 2023, report (not publicly available) titled "Moderating AUM Outlook."

As such, TIGR faces an uphill task in diversifying fast enough to fill in the gap left by the absence of new Mainland Chinese customers. Specifically, UP Fintech's expansion plans in Hong Kong play a critical role in the company's geographical diversification efforts.

UP Fintech has put in place various initiatives to support its growth plans in the Hong Kong market. According to an April 13, 2023, China Renaissance Securities report (not publicly available) titled "NDR Call Takeaways" detailing notes from TIGR's investor call on the same day, the company had utilized "free commissions" as one of the tools to "attract price-sensitive clients" in Hong Kong. Separately, UP Fintech mentioned in its Q1 2023 earnings release that the company has recently launched "a wealth management service that helps users better manage their idle cash" known as Tiger Vault in Hong Kong to attract new users for this market.

However, TIGR has yet to gain meaningful traction in Hong Kong judging by recent metrics. In the first quarter of this year, the Hong Kong market accounted for less than 5% of UP Fintech's "newly funded accounts" as per management disclosures at the first quarter earnings briefing. TIGR noted at its recent quarterly results call that "the market backdrop is still weak", and mentioned that it "didn't want to spend too much" on marketing in Hong Kong. This explains in part why the Hong Kong market's contribution to new accounts for the company as a whole was so low in Q1 2023.

It is clear that the initial performance of UP Fintech's Hong Kong business isn't up to mark, and it remains to be seen if Hong Kong can replace Mainland China as a key revenue generating market for TIGR in time to come. More significantly, UP Fintech hasn't provided specific guidance on how the company's future business mix in terms of users and assets could look like in the future.

Closing Thoughts

I leave my Hold or Neutral rating for UP Fintech unchanged. I don't have the confidence that TIGR will be successful with its growth plans in Hong Kong; and I am uncertain whether there will be new adverse regulatory developments for UP Fintech in the future.

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