UP Fintech Holding: A Tiger Yo

UP Fintech Holding Ltd (TIGER, Financial), known in China as Tiger Brokers, and its subsidiary TradeUp Securities listed on the New York Stock Exchange this year. The digital China-based online brokerage firm looks cheap at a glance, but for my part, I agree with the GF Value assessment that it is a value trap; here’s why.

About the company

UP Fintech has received a boost in investor interest due to its NYSE acceptance, increased brand awareness and momentum. Customers can get direct access to shares and trade faster at lower costs. The company’s nostrum all along has been to globalize and reduce dependence on the domestic market, aiming for scale to compensate for lower margins.

The tiger is the Chinese zodiac sign that means the king of all animals. It signifies strength in eradicating evil and bravery, and people born under the sign of the day of the Tiger are considered exceptionally lucky. This smart branding helps it gain popularity.

Tiger Broker’s proprietary mobile platform enables investors to trade stocks and other financial instruments on multiple exchanges around the world. Its “mobile first” strategy is at the heart of the company’s mission. UP Fintech has an 8.0 version of its app that provides a simplified interface and diversified product offerings quickly. At the end of June 2022, UP Fintech even served 364 American ESOP (employee stock ownership plan) customers.

NYSE membership has two distinct benefits. First, Tiger Brokers now offers clients comprehensive brokerage and value-added services, trade order placement and execution, margin financing, IPO subscription, ESOP administration, investor education, community discussions and customer support.

Second, the company is now able to recruit customers who are not Chinese citizens or residents of China. They can trade in multiple currencies, multiple markets and multiple products, through multiple execution locations and clearinghouses. The company has 59 licenses for global market coverage, including Singapore, the United States, Hong Kong and Australia.

Mixed signals

UP Fintech is certainly growing. Almost three quarters of a million customers have deposits; Their net inflows topped $1.5 billion in Q2 2022, and their retention rate is reportedly an admirable 99%.

This is where things get complicated. For the second quarter of 2022, total revenue of $53.5 million was down 11.2% year over year. Total account balances fell nearly 38% year-over-year to ~$15 billion. Margin financing and securities lending decreased 53.5% year over year to $1.6 billion. Last year’s earnings per share for the second quarter reached 13 cents, but I don’t see the company reporting any profit when it releases its next quarterly report on November 28. Why? Because the company still reported a net loss attributable to shareholders; for June alone, the net loss attributable to shareholders was $887K.

The good news for a company looking to globalize its customer base is that its deposit customers grew 38.2% year-on-year to 731,400, and 27,000 new accounts were added in the second quarter, 70% of which were based outside of China .

Valuation

For now, Tiger Brokers continues to bleed money. Profit margins are almost 4% lower than last year’s 6%. The company was debt-free until March 2021; The debt ratio went from 0.17 to 0.41. It fell back to 0.35 at the end of June. The company’s cash was enough to cover debt and interest payments when the company last reported $1.9 billion.

The GF Value chart values ​​the stock at $10.81, but there are serious warning signs and the stock has also flagged the GF Value chart’s Value Trap label. Tiger Broker’s operating margin of -5.32%, as GuruFocus points out, is worse than the 71.7% of other fintech companies.

GuruFocus gives the company a GF score of 58 out of 100.

The share has a low rating for financial strength and profitability (both 4 out of 10). Momentum and valuations are also low at 1 and 2 respectively. Contributing to the concern is the 69.62% fall in the share price over the last 12 months, the price-earnings ratio of 87.4 and the short interest approaching a whopping 16% .

Hedge funds holding stocks fell consistently from a peak of 17 in the third quarter of 2021 to just six at the end of June. They sold around 110,000 shares last quarter.

Regulatory risk

I like UP Fintech Holdings as a company, but there are too many red flags in the turbulent economic and political environment for me to like the stock. An article in the South China Morning Post warned this week that increased regulatory scrutiny of US-listed Chinese companies could slow M&A activity. Uncertainty forced US-listed Chinese companies to sell off more than $1 trillion in equity last year. I see no potential opportunity for the stock to move higher with the threat of a US delisting hanging over it.

A short story substantiates my attitude towards the Chinese business environment. UP Fintech removed the Chinese words for securities and shares from promotional material. In the latest shareholder report, management informed everyone that the company “positions itself as an online provider of information for investors in China, rather than a provider of actual financial services.”

Financial conditions in the world, unpredictable domestic policies regulating fintech, the US threat of delisting and the company’s precarious financial situation make me bearish on UP Fintech.