UP Fintech Roars Back as Investors Read Between the Lines of Mediocre Results

Key Takeaways:

• UP Fintech, better known as Tiger Brokers, announced more than half its customers are now outside China, as it aggressively diversifies to reduce a major regulatory risk
• Company entered Australia during last year’s fourth quarter as part of the diversification drive that has also seen it rapidly build up business in Hong Kong and Singapore

By Doug Young

Following a brutal few weeks that saw U.S.-listed Chinese stocks shed billions of dollars in market value, a new breed of China bulls is suddenly starting to chase the same group of companies. One of their favorite targets is a Tiger, or more precisely the discount brokerage Tiger Brokers, whose parent UP Fintech Holding Ltd. TIGR released its latest quarterly results last Friday.

Truth be told, the latest results from the smaller of China’s top two online brokers specializing in offshore stocks aren’t extremely impressive. But clearly investors saw something in the latest report, as the stock rose 33% the day of the announcement. It has continued to rally since then and is now up 58% since the report’s issue. If we go back just a few days earlier, the stock has now more than doubled from an all-time low on March 14.

China stock followers will know that UP Fintech shares are hardly alone in posting such a massive rally over the last two weeks. Just about every U.S.-listed Chinese stock is up sharply over that time, following signals from Beijing and Washington that issues behind a U.S. threat to delist the Chinese group were making good progress toward resolution.

Those positive signals continued this week, with Reuters reporting that China’s securities regulator was preparing major U.S.-listed Chinese internet firms including Alibaba BABA 9988.HK)) and Baidu BIDU 9888.HK)) to make their audit papers available to the U.S. securities regulator – the major sticking point between the two sides.

Still, the rally has been uneven, with some stocks surging more than others. UP Fintech’s chief rival, Futu FUTU, has also rallied but by a milder 68% from its all-time low on March 14. So it would seem that investors have found a new favorite in Tiger, which is also evident in its valuation.

Following the rally, the company currently trades at a forward price-to-earnings (P/E) ratio of 21, well ahead of Futu’s 11. The figure is also ahead of U.S. peer Interactive Brokers’ IBKR P/E of 19, though it’s lower than the more mature Charles Schwab’s SCHW 24.

So, what is it exactly that’s got investors roaring about this Tiger?

The answer lies less in its latest quarterly financials, which include sharply rising costs that sent the company into the red, and more in updates on the company’s drive to diversify its customer base outside China. In a signal that reflects its longer-term ambitions, the company used a Singapore dateline for its latest results, though its historical headquarters was in Beijing.

The bigger backstory is that China’s financial regulators have been sending growing signals that both UP Fintech and Futu may be operating illegally by offering brokerage services to Chinese stock buyers without a license. Both companies previously skirted this issue by saying they were merely middlemen facilitators that helped Chinese investors buy overseas stocks using licensed local third-party brokerages to handle actual trading.

But the regulator wasn’t buying into that story. One of the loudest signals of impending danger came last October when the People’s Daily, the Communist Party’s official newspaper, published an article saying cross-border online brokers focusing on the U.S. and Hong Kong stock markets had “found themselves where the wind and the waves are at their fiercest.”

Diversification drive

Truth be told, the signals were coming well before October, leading both UP Fintech and Futu to increasingly diversify on a number of fronts. The biggest of those has seen each company try to sign up more customers outside China. UP Fintech is also driving into other financial services, most notably underwriting services for Chinese companies making offshore listings.

In terms of customer diversification, UP Fintech crossed a major milestone in the fourth quarter with the majority of its 673,400 funded accounts at year-end now outside the Chinese mainland. The company added 61,400 funded accounts during the quarter, representing a sharp slowdown from previous quarters. But notably, it said that more than 90% of the new accounts opened during the period were from outside China.

In another notable development, the company said it also entered the Australian market last month and can sign up new customers there. UP Fintech previously was adding new customers in both Hong Kong and Singapore, and notched another milestone in Singapore late last year when it was approved as a Central Depository (CDP) Agent in the city state. That allows Tiger to directly hold shares purchased by its customers in Singapore instead of using a third party.

“Given we only started to operate in Singapore two years ago, the rapid growth of our Singapore client base demonstrates our execution capability and the growing appeal of our platform across multiple countries and regions,” CEO Wu Tianhua said in a statement with the results.

All that said, we’ll close with a look at UP Fintech’s actual quarterly financials, which, as we said at the start, look solid but not impressive enough to justify the huge post-announcement rally.

The company’s revenue for the quarter rose 32% year-on-year to $62.2 million, far slower than the 91% revenue growth it reported for the whole year. Within the bigger fourth-quarter figure, commissions revenue from its core trading business rose just 18% to $30 million, representing roughly half the total. Interest income, mostly from margin traders, rose by a much bigger 73.5% to $20.3 million. And financial services, which includes IPO underwriting, rose 44.5% to $2.3 million.

At the same time, the company’s operating expenses shot up by nearly 80% to $64.9 million – more than its revenue – presumably as it incurred large expenses related to its drive into new markets. As a result, the company slipped into the red with a $5.4 million loss for the quarter, compared with a $8.5 million profit a year earlier.

Picking a bottom is always tricky business when it comes to stock buying, and the latest impressive but brief rally for UP Fintech could easily be reversed if new negative signals emerge on its own regulatory situation or U.S.-listed China stocks in general. Still, investors with a stomach for volatility might want to give this Tiger serious consideration if they want take a chance on a comeback for beaten-down U.S.-listed Chinese stocks.