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• Benefitting from US stock market rebound in 1Q23, TIGR enjoyed sequential growth in new paying clients with lower CAC.

• China regulators clarified guideline regarding the definition of onshore investors, suggesting regulatory overhang close to the end.

• Reiterate HOLD and cut TP to US$3.26 (based on 17.0x 2023E P/E).

Source: China Renaissance

Benefit from US stock market rebound in 1Q23. UP Fintech (TIGR) acquired 30,392 new paying clients in 1Q23, up 11.2% QoQ, with Singapore contributing 60%, US 20%, AUS/NZ 15%, and Hong Kong 5%. As of end-1Q23, TIGR had around 48% of paying clients from Singapore with average client assets of US$15,000, up from US$13,000 in 4Q22. CAC was down 37% QoQ to US$171, mainly helped by more moderate marketing campaign amid volatile market. Execution and clearing expenses as a percentage of commission income declined to 9.6% in 1Q23 (vs 16.1% in 4Q22) helped by HK stocks’ self-clearing. TIGR reiterates its 2023 target of 100,000 new paying clients with CAC increased to US$300 in 2Q23 amid increasing marketing campaign in Hong Kong. In 2Q23 QTD, TIGR sees its trading volume, client assets and new paying clients down QoQ, with a flattish MFSL balance, following the weaker market sentiment since 1Q23.

China regulatory uncertainties should be close to the end. Management noted that China regulators clarified some guidelines lately: 1) onshore investors who live or work overseas are allowed to open new accounts with TIGR, 2) onshore investors who prove to have an offshore brokerage account will be considered as existing clients and could open new accounts and transfer their existing securities to TIGR, 3) TIGR is allowed to keep its supporting team and R&D facilities in mainland China to serve existing onshore investors, and 4) TIGR app is removed from China app store to ensure no other onshore clients apart from the aforementioned scenarios. TIGR reiterated that the removal of its app in China does not affect existing clients as it provides detailed instructions on app download and updates. In 1Q23, total client assets of onshore clients increased by 10% QoQ with continued net asset inflows, indicating high client stickiness for TIGR.

Maintain HOLD and lower TP to US$3.26. We raise our forecasts for 2023E-25E non-GAAP net income by 9%-16% as we: 1) increase MFSL balance by 5%-6%; 2) lower S&M expense by 21%-24%; and 3) increase client assets by 10%; which together offset our 3%-4% cut in stock trading volume. However, we lower our target price to US$3.26 from US$3.46 with a lower target 2023E P/E multiple of 17.0x (previously 20.0x), below -0.5 SD of its past three years’ average 12-month forward P/E, to reflect a slower 2023E-25E earnings CAGR of 16.8% (previously 20.4%), implying 1.0x PEG. We expect TIGR’s share price to be range-bound until it shows strong client acquisition and trading volume in HK.

Key risks include: Upside – improved stock market sentiment; faster overseas expansion. Downside – further market downturn and reduced retail investor participation; slower expansion overseas.

1Q23 results review

Estimate revisions

We raise our forecasts for 2023E/ 24E/ 25E non-GAAP net income by 16%/ 15%/ 9% as we: 1) increase our forecasts for MFSL balance by 5%-6%; 2) lower marketing and branding expense forecasts by 21%-24%; and 3) increase client assets forecast by 10%; offsetting 4) our 3%-4% cut in stock trading volume forecasts.

Valuation

Maintain HOLD and lower target price to US$3.26. We lower our target price to US$3.26 from US$3.46 based on a new target 2023E P/E multiple of 17.0x (previously 20.0x), below -0.5 SD of its past three years’ average 12-month forward P/E. We lower our target P/E multiple to reflect a 2023E-25E earnings CAGR of 16.8%, implying 1.0x PEG. We expect TIGR’s share price to be range-bound until it shows strong client acquisition and trading volume in Hong Kong. Thus, we keep our HOLD rating.

Potential share price catalysts include: 1) removal of regulatory overhang; 2) higher-than-expected number of new paying customers; and 3) an increase in client assets and trading volume driving up commission income.

Using paying customer lifetime value (CLV) as a cross-check for TIGR’s valuation, we calculate its fair value at US$13.16 – assuming 892,000 paying customers in 4Q23E, 2% churn rate per quarter, ARPU of US$316 per quarter, gross margin of 72%, customer acquisition costs (CAC) per paying client of US$366, and a discount rate of 13%. As CAC would be a one-time cost, the number of paying customers, ARPU, churn rate and gross margin are the key variables affecting TIGR’s valuation. The difference between the derived fair value and our target price of US$3.26 is that we do not consider operating costs in this approach. Since TIGR has not yet reached a level to benefit from economies of scale, any decline in revenue with less room to save on operating costs would weigh on its earnings.

Risks

Upside risks include:

• Improved stock market sentiment. If economic recovery comes faster than we expect, market sentiment could improve, leading to growth in trading turnover and margin finance balances for TIGR. This could lead to faster paying customer growth and increases in commission, financing service and interest income.

• Faster international business development. If the international expansion of TIGR’s business, especially in HK, is more successful than we expect in terms of growth of the client base, retention and activation rate of current clients, and shorter payback period, TIGR could enjoy above-forecast growth in commission and interest income.

• Better-than-expected efficiency improvement in self-clearing HK stocks. We expect self-clearing capabilities in the HK market to help TIGR manage its operating costs in an effective manner. Establishing a smooth and stable self-clearing process in HK could help TIGR to save more costs, leading to a higher profit margin.

Downside risks include:

• Market downturn and reduced participation by retail investors. TIGR’s business is highly correlated with securities market performance and, if the markets in which it is active take a downward turn and retail investors are discouraged from investing, slower paying customer growth, lower trading turnover and lower margin finance balances could be the result.

• Slower-than-expected market expansion. If market expansion in Australia and HK does not proceed at the pace expected by management, user growth may be lower than we expect and would negatively affect our earnings growth forecasts for TIGR.

• Intensifying competition. More aggressive pricing competition on commission rates and margin financing rates from other online brokers may affect TIGR’s pricing strategy and impact its market share. This could lead to lower-than-expected user growth and a lower profit margin.

• Delisting risk. TIGR’s own ADSs may be prohibited from trading in the over-the-counter market under the US Holding Foreign Companies Accountable Act (HFCAA), if the Public Company Accounting Oversight Board (PCAOB) is unable to inspect or fully investigate audited accounts of companies headquartered in China for two consecutive years.