UP Fintech (TIGR) flexes global expansion muscle with NYSE membership

Online brokerage UP Fintech Holding Ltd (NASDAQ:TIGR) list of global credentials is growing longer as it continues to expand beyond China where it was founded.

On Monday, the company, best known for its Tiger Brokers service, had its say TradeUP Securities unit, a US broker-dealer that UP Fintech acquired in 2019, became a member from the New York Stock Exchange (NYSE).

This means that UP Fintech can now offer its clients direct access to the NYSE, enabling them to execute trades there faster and at lower costs by eliminating the need to use third-party intermediaries that charge transaction fees.

UP Fintech is now technically a member of three different NYSE entities, increasing its number of global licenses and qualifications to 59 from 56. Formerly based in Beijing, the company is collecting such trophies as it tries to reduce its exposure to China after Beijing regulators said last year that UP Fintech, as well as rival Futu Holdings Ltd. (FUTU), possibly operated illegally in the country by offering financial services without the necessary licenses.

In fact, UP Fintech is subject to a complex web of ever-evolving regulations in China, where regulators are greatly tightening oversight of a new generation of privately owned financial service providers that have emerged over the past 10 years.

Firstly, there are regulations for securities and futures brokers. Already in 2016, one of the company’s units in China was ordered by the China Securities Regulatory Commission (CSRC) to stop cooperating with unauthorized foreign companies providing securities services in the country.

But instead of severing ties with such partners, UP Fintech responded by removing its own links to account opening features on the website and app developed by the Chinese entity that was the source of the CSRC’s order.

UP Fintech also removed the Chinese words for securities and shares from the name of the partner app. It subsequently notified the CSRC of the changes, but still said in its latest annual report that it could not reassure investors that all was well with regulators.

UP Fintech now positions itself as an online provider of information for investors in China, rather than a provider of actual financial services such as securities trading, all of which are offered on the platform with the help of third-party partners.

However, such investor information services are also subject to a wide range of regulations, such as those relating to telecommunications, online publishing, cyber security and privacy.

All this shows how difficult life can be for companies like UP Fintech in China. To ease such regulatory risk, UP Fintech has been looking to build up business from foreign stock buyers, and has won brokerage licenses in the US, Hong Kong, Singapore, New Zealand and Australia.

Singapore has been key for UP Fintech among these markets. The company is now incorporated into the Asian financial hub, and received approval to clear trades on the city-state’s stock exchange last year. By contrast, Futu has focused on Hong Kong, seeking to take advantage of a shift among investors in the highly autonomous Chinese city to large, safer brokerages from many small ones.

Success in Singapore

Both international expansion strategies seem to be working. In the three months to June, UP Fintech posted a non-GAAP net profit of $3.5 million, compared with a loss of $4.4 million a year earlier, as its customer base outside China continued to grow, according to the company’s latest quarterly results that were published. earlier this month.

Futu, which was already generating more profit than UP Fintech, did even better in the period, increasing its non-GAAP net income by 25% to about $88 million.

For both companies, it is crucial to increase their customer base with deposits in the accounts for trading, instead of those who just open accounts and leave them empty, because the former type generates income.

At UP Fintech, the number of such clients increased by more than 38% during the last reporting period, which was far higher than the growth in the total clientele. More than 70% of UP Fintech accounts with funds are now held by customers outside of China.

UP Fintech says its market share in Singapore continued to increase. Not only that, it retained 99% of its clients with assets in the Lion City in the second quarter, with net assets from those clients exceeding $9,000 per client on average during the period, up from $8,000 in the previous quarter.

Also, the number of trading lots on the company’s platform in Singapore increased by 110% year-on-year in the second quarter, while the trading volume of options almost doubled.

Having established itself in Singapore, the company is looking to replicate this success in Australia after launching a service in the market in the first quarter. Currently, UP Fintech is “still testing the waters and making an all-out effort to localize our products and services,” the brokerage said in its second-quarter results announcement.

The US may be out of reach for UP Fintech for now, given intense competition from other popular discount brokers such as Charles Schwab (SCHW) and Interactive brokers (IBKR).

But the new ability to connect users directly to the NYSE may still give UP Fintech an advantage, especially in terms of cost. The company can save fees it pays other brokers to carry out trades, and pass it on to its own customers in the form of more attractive prices.

The NYSE membership will also allow UP Fintech to reduce its heavy reliance on Interactive Brokers, which executed and cleared well over half of the company’s net revenue last year.

This share was already sharply down from more than 70% in the previous year, likely because UP Fintech began clearing some US equity trades on its own in Q3 2019 following the acquisition of TradeUP Securities. With the NYSE membership, UP Fintech’s reliance on interactive brokers is likely to be further reduced.

UP Fintech shares fell on Tuesday following the announcement of the NYSE membership. But one should not read too much into this decline, as expectations of the Fed’s latest major rate hike announced later this week have weighed on the broader market for much of the past week.

UP Fintech’s shares still trade at a price-to-earnings (P/E) ratio of more than 74, far higher than Futu’s 20. The huge difference may be largely due to the former’s relatively small profits, but UP Fintech’s high ratio shows that investors are giving it a vote of confidence as it continues to successfully expand beyond China.

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Editor’s note: The summary points for this article were selected by the Seeking Alpha editors.