Updated: Feb 2
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TIGR runs its proprietary trading platform - Tiger Trade which gives international investors access to a vast array of financial products
Trading at a Gross Profit Multiple of 22.18x with YoY 9M20 Net Revenue Growth of 137%
Management is focused on expanding its geographic operations into high potential markets such as India
Strong revenue growth in 2020 on the back of expansion into Singapore and increased trading levels amongst millennials and Gen Z
Achieved profitability for the first time in 1Q20
When Tiger Brokers (TIGR) allowed trading of SGX securities on its platform in June of 2020, it immediately caught my attention for its low commission rate of 0.08% and easy to use mobile application.
However, given that the trading platform was relatively new and thus had yet to garner many reviews by the public, I was hesitant to port over to the new broker in town.
Fast forward 6 months and many raving reviews later, I find myself not only looking into shifting to Tiger Brokers but also at its stock. It is currently listed as Up Fintech Holding Ltd (TIGR:US) on the NASDAQ and has surged more than 262% in the last 1 year. Below I will examine TIGR's business and if there remains the potential for growth.
Founded in 2014, the founder-led company runs its proprietary trading platform - Tiger Trade which gives international investors, the ability to access the U.S., Hong Kong, Singapore, and Australian equity markets in addition to A-shares and other financial instruments such as futures and options. On top of brokerage, it offers value-added services including ESOP management, investment banking, wealth management, and investor education.
TIGR derives its revenue from 3 main sources – Commissions (51.3%), Interest income (21.3%), Financing service fees (4.5%), and Others (23.1%). Other revenues mainly comprise IPO distribution services.
In the extremely competitive world of brokerages, TIGR has found its edge over its peers by introducing lower commission rates and developing its proprietary trading platform - Tiger Trade.
Summary of Competitive Advantages of Tiger Brokers
1. Proprietary mobile and online trading platform
Image: Tiger Brokers
As part of its "mobile-first" strategy, TIGR has developed a phone application that has one of the most seamless interfaces. It includes various tabs such as 'Quote' where users can view their watchlist and 'Discover' where stocks with the highest volumes are listed. In addition, the platform regularly hosts trading competitions and has a social media-like feature where users can follow others and publish posts. The increased social interaction on Tiger Trade helps to boost its customer stickiness in the long term.
The emphasis on mobile in an attempt to target the younger generation has worked out well with more than 80% of new users in 3Q20 under 45 years old.
2. A wider array of financial products and services
Tiger Trade offers more than public equities as mentioned in the introduction above. Eager to expand its product offering, it introduced “Fund Mall” in 1Q20 where users may subscribe to a wide range of mutual funds that span numerous asset classes from major institutional asset managers. It continues to increase the number of funds and this helps TIGR to be a "one-stop-shop" for investors by cross-selling them multiple financial products.
3. Strong Tiger Community
TIGR has a community website (laohu8.com) that hosts discussion forums, education, and news. Furthermore, the Tiger Trade application has an in-built community feature where users can interact and exchange stock ideas.
Is Tiger Brokers safe?
This is a common question amongst investors given Tiger Trade is relatively new. However, TIGR uses a reputable backend clearing agent, Interactive Brokers, which has more than 42 years of experience as a Broker-Dealer and a consolidated equity capital of more than US$8.5 billion.
In addition, Tiger Brokers (Singapore) is licensed by the Monetary Authority of Singapore (MAS) and is in compliance with the Securities and Futures Act.
Thus, while its interface is new, its backend processing system is not and should be trusted.
TIGR is currently led by its Founder, Chief Executive Officer, and Director Mr. Wu Tianhua who owns 17.28% of common stock as of 31 March 2020. Before founding the company, he worked at Youdao (NYSE: DAO) of NetEase Inc., where he was responsible for core search. He obtained both bachelor’s and master’s degrees in computer science and technology from Tsinghua University.
Cognisant of the benefits of expanding into new geographic markets, the management has stated that it intends to apply for appropriate licenses or acquire companies that hold such licenses that allow it to provide its products and services to investors in countries such as India and has been good on their word of expanding into Singapore in 2020.
Management continues to significantly invest in R&D to increase the competitiveness of its platform as seen by a high headcount of 40.8% of its employees in the Research, Development, and Technology department.
The Company commenced its share repurchase program on April 1, 2020. As of November 24, 2020, the company had repurchased an aggregate of 695,287 ADSs for an approximate consideration of US$2.2 million representing an approximate cost of US$3.16 per share.
Growth of Customer Base
TIGR continued to grow its user base in 2020 through the introduction of new products, expansion into Singapore, and surge in investment optimism amongst millennials and Gen Z who TIGR are targeting.
Is growth sustainable?
There remain many financial products to introduce such as Robo-advisory as well as new geographic markets to expand into like India where management cited their intent to expand into in its Annual Report 2019 (pg 47).
An interesting angle to look from is the increasing percentage of funded accounts. As of 3Q20, only 22.01% of customers had deposits implying much room for conversion into funded accounts and thus, possibly an increase in trading volume.
Leveraging on its mobile application and "refer a friend" promotion, TIGR has the potential to capture a greater market share of millennials and Gen Z who enter the investing arena.
In 3Q20, TIGR earned a revenue of US$38 million from 214,700 funded accounts. Extrapolating the data, TIGR will record a revenue of $USD 708.77 per funded account per year. This implies that the 166 million Gen Z and millennial population in the US represents a US$ 177.7 billion total addressable market.
If TIGR can continue to capture market share at a consistent rate, high rates of growth can be expected to continue.
1. Net Revenue Growth
TIGR's net revenue has been growing steadily since 2016 and experienced a tremendous surge in 2020 as a result of the onboard of Singapore customers, increased trading volume, and an increase in IPO distribution services. In addition, the pandemic has spurred many to take up day trading for entertainment and profits as reported by CNBC.
2. Gross Margin
TIGR continued to deliver strong gross margins, albeit a drop in the last 2 years. I speculate this is partly due to TIGR offering new users opening promotions where a limited number of free/discounted trades are given. Thus, its execution and clearing charge increased more than proportionately to its revenue, resulting in lower gross margins. I believe the 9M20 figure understates its long term gross margin.
3. Recently Achieved Profitability
The recent surge in active customers and thus increase in trading-related revenue has led to TIGR achieving profitability for the first time. Given that a proportion of customers are still under the opening promotion commissions, I forecast that the gross margin will recover together with an increase in revenue, leading to further upside to net income.
4. Other Revenues Proportion is Inconsistent
TIGR's 3 main revenue streams (commissions, interest income, and finance servicing fees) have been growing steadily over the last 12 months. However, the revenue from other sources, mainly IPO distribution services, is extremely lumpy.
The revenue from IPO distribution services is lumpy and cyclical given that IPOs of Chinese companies which TIGR focuses on underwriting, tends to occur more frequently at the middle and end of the year.
In 2020, TIGR had underwritten more IPOs given the increase in retail and institutional interest in the stock market, which resulted in more companies going public as seen by the 480 IPOs in the US, more than double that in 2019.
This resulted in the surge in TIGR's proportion of revenue from IPO distribution services in 3Q20.
The sustainability of this revenue stream is doubtful given it relies on the reputation of TIGR as an underwriter and the continued rise in the number of IPOs. I will discuss this in more detail under the risk factors.
5. Unit Economics
In 1Q20, TIGR finally reached the inflection point where the total revenue eclipsed the fixed and variable costs. The total revenue per US$1 of trading volume remains largely constant between $US 0.05 - 0.06 cents which have outweighed the declining operating costs / US$1 of trading volume as trading volume continues to spike.
A possible reversal of the improving unit economics could be triggered by the continued upward trajectory of marketing and branding costs as TIGR expands its geographical reach. However, I believe the impact will be partly mitigated by the end of opening promotion commission rates for the over 320,000 accounts opened in the first 9 months of 2020, which make up over 30% of all accounts.
At first glance, TIGR (also known as "Up Fintech Holding Limited") may seem vastly overvalued compared to its peers. However, it must be noted that TIGR is a much younger company with superior revenue growth. Also, it has one of the lowest market caps amongst the above-mentioned peers implying a higher potential to capture more market share to support further growth.
Further analyzing TIGR, its Gross Profit Multiple (Market Cap / Gross Profit) is 22.18x. This is a higher multiple than the 15x I am comfortable assigning to high ROIC, durable economic moat and, low capital intensity businesses. However, if you have the conviction that TIGR will continue to grow its revenue at high levels, then the valuation seems justifiable.
1. License approval in a new country
Management has stated its intent in applying for or buying over a company with a brokerage license in India. Given its large population with a growing middle class, a license approval or acquisition could allow TIGR to leverage on its proprietary platform and expand its customer base. The Indian brokerage industry registered income of US$ 2.86 billion in FY20, an 8% increase over FY19, implying a significantly large total addressable market for TIGR to tap into.
2. 4Q20 earnings surprise and a steady pipeline of IPOs
Due to report 4Q20 earnings in March 2021, a continued surge in net profit and new customer accounts will add to its positive momentum. In addition, if TIGR can build a strong pipeline of IPOs, it will help to cement a new revenue stream and provide a clearer forecast of future revenue.
3. Introduce new products
In 2020, TIGR had introduced new products such as "Fund Mall" and Singapore-listed equities. If it continues improving the selection of funds in its wealth management business and provides new services such as Robo-advisory it will attract new clients and keep customer retention rates high.
1. Over-reliance on Interactive Brokers as its clearing agent
Given its heavy reliance on Interactive Brokers, where for the years ended December 31, 2017, 2018, and 2019, 99.5%, 96.8%, and 78.4% of total net revenue was executed and cleared by Interactive Brokers, I was concerned about the scenario where Interactive Brokers ceased to be a clearing agent for TIGR.
TIGR addressed the ramifications of this scenario in its Annual Report 2019 stating that if they are “unsuccessful in maintaining our relationships with Interactive Brokers, our operating cost and expenses might increase, which may materially and adversely affect our financial condition and results of operations”.
However, IB Global Investments LLC is a major shareholder of Up Fintech Holding Ltd ( or known as "Tiger Brokers") with an 8.15% Class A share ownership. Thus, Interactive Brokers would be incentivized to maintain a healthy relationship with TIGR and see it grow.
2. Possible Governance Issues
In April 2020, the Financial Markets Authority (FMA) of New Zealand issued a formal warning to Tiger Brokers (NZ) Limited for "purposes of section 80 of Anti-Money Laundering and Countering Financing of Terrorism Act 2009".
In addition, the NZ Markets Disciplinary Tribunal publicly censured and fined Tiger Brokers (NZ) Limited $160,000 in July 2020 for "depositing Client Funds in an account which was not a Client Funds Account under the Rules and for failing to comply with a direction from NZX to cease using that account".
GEO Investing, a microcap research company, published a report in October 2019 alleging that UP Fintech Holding Ltd. is operating an illegal money laundering scheme.
3. Possible reversal of trading and IPO volume post-pandemic
As mentioned above, trading volume partly increased due to the pandemic spurring the public to seek out new ways of entertainment and earning extra income. Post pandemic, I am sceptical that the surge in trading volume will continue at the same rate. Furthermore, its IPO underwriting business is subject to its reputation and is closely tied to the Chinese IPO market which has seen record levels of activity in 2020 and may not be sustainable.
4. More competition from new brokerages
Presently, TIGR is considered one of the best brokerages for AUM under $100,000 in Singapore with regard to its fees. However, if new entrants offer lower rates, it could force TIGR to cut its fees and trigger a "race to the bottom". However, I believe that TIGR's fees are sufficiently low and the stickiness from its community feature and proprietary platform should keep its customer retention rates high.
The surge in investment optimism amongst millennials and Gen Z in 2020 coupled with geographic expansion has enabled TIGR to produce exceptional financial results.
With keen intent from management to continue expanding into new markets, inorganic revenue growth can be expected. In addition, the increase in commission rates from the ceasing of opening promotions for newly onboarded clients could be a further cause for upside.
However, I am slightly concerned by its possible governance issues and am sceptical that overall trading volume will continue to increase at the same rate as it did in 2020. Given that TIGR is trading at 47.8% above the Gross Profit Multiple of 15x I am comfortable with, I am cautious of investing in TIGR.
Thanks for reading,
Disclaimer: I/The Snowball has no position in this company. This article is not an investment (buy/hold/sell or otherwise) recommendation, this is only for educational and discussion purposes. This article is not tailored to the specific circumstances of any reader. I/we/The Snowball do/does not purport to be in the business of providing financial advice and the contents of the article should not be regarded as such.
Cover photo source: Mark Finn on Unsplash