UP Fintech Holding Ltd (TIGR, 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 gotten a boost in investor interest due to its NYSE acceptance, heightened brand awareness and momentum. Its clients can directly access stocks and trade faster at lower costs. The company’s nostrum all along has been to globalize and reduce reliance on its home market, aiming for scale to make up for lower margins.
The tiger is the Chinese zodiac sign signifying the king of all beasts. It denotes strength in excoriating evils and braveness, and people born under the sign on the Day of the Tiger are considered extraordinarily lucky. This smart branding is helping it gain popularity.
Tiger Broker’s proprietary mobile platform enables investors to trade in equities and other financial instruments on multiple exchanges around the world. Its “mobile first” strategy is 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 speedily. By the close of June 2022, UP Fintech was even servicing 364 U.S. ESOP (employee stock ownership plan) clients.
NYSE membership has two distinct advantages. First, Tiger Brokers now offers clients comprehensive brokerage and value-added services, trade order placements and executions, margin financing, IPO subscriptions, ESOP management, investor education, community discussions and customer support.
Second, the company is now able to recruit clients who are not Chinese citizens or residing in China. They can trade in multiple currencies, multiple markets and multiple products, through multiple execution venues and clearinghouses. The company holds 59 licenses for global market coverage including Singapore, the U.S., Hong Kong and Australia.
Mixed signals
UP Fintech is certainly growing. Nearly three-quarters of a million clients have deposits; their net asset inflow topped $1.5 billion in the second quarter of 2022, and the retention rate is reportedly an admirable 99%.
Here's where things become complicated. For the second quarter of 2022, total revenue of $53.5 million was down 11.2% year-over-year. The total account balance fell almost 38% year-over-year to ~$15 billion. Margin financing and securities lending were down 53.5% year-over-year to $1.6 billion. Last year’s earnings per share for the second quarter hit 13 cents, but I do not foresee the company reporting any profit when it releases its next quarterly report on Nov. 28. Why? Because the company was still reporting a net loss attributed to shareholders; for June alone, the net loss attributed to shareholders was $887K.
The good news for a company looking to globalize its client base is that its customers with deposits increased 38.2% year-over-year to 731,400, and 27,000 new accounts were added in the second quarter, 70% of which were based outside 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-to-equity ratio popped 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 last reported the company at $1.9 billion.
The GF Value chart values the stock at $10.81, but there are severe 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 71.7% of other fintech companies.
GuruFocus gives the company a GF Score of 58 out of 100.
The stock has low ratings for financial strength and profitability (both 4 out of 10). The momentum and value ratings are also low at 1 and 2, respectively. Contributing to the worry is the 69.62% tumble in the share price over the past 12 months, the price-earnings ratio of 87.4 and the short interest approaching a whopping 16%.
Hedge funds holding shares fell consistently from a high of 17 in the third quarter of 2021 to just six by the end of June. They sold about 110,000 shares last quarter.
Regulatory risk
I like UP Fintech Holdings as a company, but there are just too many red flags in the turbulent financial 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 U.S.-listed Chinese companies could slow M&A activity. Uncertainty forced Chinese companies listed in the U.S. to sell off more than $1 trillion in equity last year. I do not see any potential opportunity for the stock to move higher with the threat of U.S. delisting hanging over it.
One short story underpins my atttitude on the Chinese business environment. UP Fintech removed the Chinese words for securities and stocks from promotional materials. In the last shareholder report, management informed everyone the company “positions itself as an online provider of information for investors in China, rather than a provider of actual financial services.”
World financial conditions, unpredictable domestic politics regulating fintech, the U.S. threat of delisting and the company's precarious financial situation all leave me bearish on UP Fintech.
