After writing about Futu (FUTU) and concluding with a buy recommendation, I wanted to highlight to investors another Asia-based digital brokerage firm in the high-return/high-risk segment: UP Fintech (NASDAQ: TIGR). UP Fintech saw huge business growth over the past few years and the company hit a valuation of over $8 billion in early 2021. Afterwards, the stock sold off significantly as the market feared a regulatory industry crackdown Chinese online brokerage. Today, UP Fintech is down more than 88% against ATH and valued at just over $500 million. Risk-seeking investors might want to speculate with the stock. I start with a high buy/risk recommendation and set a target price of $6.74/share.
About UP Fintech
UP Fintech Holdings Limited, also known as Tiger Brokers, is a fully digitized securities brokerage firm headquartered in Singapore and China. Like Futu – and Robinhood (HOOD) in the US – Tiger Brokers has strategically positioned its business to serve the emerging investor class: young and digital natives. Founded in 2014, UP Fintech operates an easy-to-use, mobile-friendly investment platform that allows clients to trade securities in Australia, the United States, Singapore and Hong Kong. In addition, the company also offers margin financing, IPO underwriting, ESOP management, investor education, and community discussion platform. Tiger Brokers listed on the US stock exchange in September 2014. Notably, UP Fintech is backed by strategic shareholders, including Interactive Brokers (IBKR) and Xiaomi (OTCPK:XIACF).
Tiger Brokers has experienced tremendous growth since the company’s inception. As of December 2021, UP Fintech had 673,400 funded accounts, of which 414,700 were added in 2021. Additionally, UP Fintech increased its revenue from $33.6 million in 2018 to $266.1 million in 2021, which which implies a CAGR of around 94%.
That said, UP Fintech is a bit smaller than FUTU, which had over 1.2 million funded accounts as of December 2021. dollars from FUTU.
Unfortunately, UP Fintech is also exposed to regulatory risk in China. UP Fintech does not currently hold a brokerage license for China and many market players, including well-known short seller Jim Chanos, are betting on a big drop for Chinese online brokerage firms, if the CCP decides to regulate trading services that allow Chinese citizens to invest money overseas. Jim Chanos presents the problem in point:
…trading shares in the People’s Republic of China on western stock exchanges is illegal and Futu is basically about getting a Chinese citizen among other citizens to trade shares through Hong Kong or Singapore on western markets , which is technically against the law in China. So it’s a unique situation.
That said, UP Fintech has pushed to diversify away from China. In 2021, the company announced a second headquarters in Singapore. Additionally, it has invested heavily to establish a strong presence in Singapore and enter the Australian market. Notably, in Q4 2021, UP Fintech added over 50,000 accounts outside of China, which accounted for approximately 90% of the company’s new funded accounts. Additionally, in October 2021, UP Fintech also completed the acquisition of Ocean Joy Securities, which provides the company with access to a brokerage license in Hong Kong.
UP Fintech is profitable, which I think could be easily underestimated due to such a fast-growing company that grew revenue by over 90% year-over-year in 2021. 2021, UP Fintech generated $37.3 million EBITDA (13.6% margin) and $14.7 million net income (5.5% margin), or $0.15/share . Cash provided by operations amounted to $413 million, mainly due to the company recording strong cash inflows from its customers. UP Fintech ended 2021 with $1.7 billion in cash and cash equivalents and total debt of $149 million. That said, financial worries should not pose a short-term risk to the company or its investors.
Notably, analyst consensus believes that UP Fintech’s growth and profitability are sustainable. Consensus predicts company revenue growth in 2022, 2023, and 2024 at $263m, $355m, $480m, implying a 3-year CAGR >20%. EPS are estimated at $0.07, $0.19, $0.26 respectively (Source: Bloomberg Terminal).
To value the TIGR share, I suggest using the same valuation method as for FUTU and anchoring on parallel assumptions.
That said, I’ve constructed a residual earnings framework based on consensus analyst forecasts for EPS through 2025, a WACC of 10.5%, and a TV growth rate one percentage point higher than nominal GDP growth. The 10% WACC is anchored on Robinhood’s cost of capital and includes a premium of approximately 100% to reflect regulatory exposure to China.
Based on the assumptions above, my valuation estimates a fair share price of $6.74/share, implying >60% upside potential based on accounting fundamentals.
I have also attached a sensitivity analysis based on different combinations of WACC and TV growth. For reference, red cells imply overvaluation, while green cells imply undervaluation relative to TIGR’s current valuation. And above all, all the scenarios tested involve an undervaluation.
Similar to Futu, I would like to point out the same risks that can cause TIGR stock to deviate significantly from my target price:
First, the business activities of UP Fintech are strongly linked to the health of the financial markets. If the markets sell off significantly, trading interest and volume will likely decrease significantly and thus slow UP Fintech’s growth and financial success. In addition, UP Fintech provides margin funding to clients, and a strong equity sell-off could expose UP Fintech to directional security exposure and investment losses as clients cannot meet margin calls. .
Second, a significant economic downturn in China, due to COVID-related lockdowns, the real estate crisis and inflation, could have a significant impact on Chinese citizens’ willingness and ability to invest in financial assets.
Third, much of UP Fintech’s share price is currently determined by investor sentiment towards risky assets, ADRs and Chinese stocks. Thus, investors should closely monitor market sentiment when making buy/sell decisions for the stock.
Fourth, and most importantly, UP Fintech is exposed to significant regulatory risks. As I mentioned in the introduction, there is a lot of uncertainty related to online brokerage in China, especially for services that allow citizens to invest overseas. That said, the regulatory environment in China could break or render the investment thesis outlined in this article.
I like TIGR stocks. And given the company’s financials and growth potential, I think the stock deserves a Buy recommendation. However, given the regulatory exposure to China, I am adding a “high risk” label to reflect that this idea is aimed at speculators. My base target price is $6.74/share, implying more than 60% upside potential.