Key points:

• UP Fintech’s revenue increased 19% year-over-year in the first quarter as the number of funded accounts grew 15%
• The online brokerage has entered Hong Kong as its latest new market as part of a growing international expansion after a major clash with China’s regulator

By Warren Yang

The expert company is the one that can identify a problem early and solve it before it explodes. Online stockbroker UP Fintech Holding SA TIGR deserves some credit for sensing and preparing for the regulatory storm clouds that are a common feature of the Chinese business landscape.

Just a year and a half ago, the company, known locally as Tiger Brokers, suddenly found itself in very hot water after China’s securities regulator nearly shut it down in the country, along with rival Futu Holdings Ltd. FUTU, for violating national laws relating to cross-border trade. Fast forward to the present, when the company latest financial results show that this tiger has not only overcome its brush with death, but is also thriving by betting on greater international attention.

Such rapid recoveries are no easy feat, forcing companies to reinvent their business models, often from scratch, in a race against time before their funding runs out. Venturing outside China, as UP Fintech has done, is always an option that sounds good in theory. But the reality is not always so simple as foreign markets have their own complexities, not to mention established local competition.

UP Fintech and Futu had plenty of time to prepare before their situation at home exploded in late 2022. Signs had come in previous years in comments from various regulatory officials, prompting both companies to keep their heads down in home as they quietly built and set up operations abroad, one new market at a time. These efforts are bearing fruit now.

UP Fintech’s revenue rose 19% to about $79 million year over year in the first quarter, as its portfolio of funded accounts – those containing real money for trading – grew 15%, according to latest published results last Wednesday. Its net income jumped more than 50% to $12.3 million, due largely to “other” income that is not part of what it classifies as revenue.

Following the announcement, UP Fintech shares rallied 16% through the end of last week.

While the surge in profits appears attributable to a non-operational factor, UP Fintech’s revenue growth still looks quite solid and speaks to its early move beyond China. The company has made money in the past by helping China-based investors buy stocks listed in the United States and Hong Kong. But in recent years it has added more stock markets to its services and is now targeting clients outside China since it was banned from signing up new Chinese clients.

UP Fintech was originally based in Beijing, but is now based in Singapore and generates more than 90% of its revenue outside of China. Singapore is the company’s largest market and accounted for more than half of its new accounts funded in the first quarter. But it also operates in the United States and the Australia/New Zealand region. Last year it also launched services in Hong Kong, which has also become the main market for Futu.

Hong Kong expansion

UP Fintech entered Hong Kong through the acquisition of a company called Ocean Joy in late 2021. It then took some time to get its business up and running in Hong Kong. But since launching the service last year, the company has quickly gained traction. In the first quarter, around 10% of UP Fintech’s new funded accounts came from Hong Kong, not far behind the around 15% in the Australian/New Zealand market.

Hong Kong’s revenue contribution for UP Fintech could continue to increase as it expands its services in the city that is part of China but has its own financial system that is much more open to foreigners than mainland China’s two major markets, Shanghai and Shenzhen. It started offering cryptocurrency spot trading services for professional investors in the city. And in March it received a so-called Type 9 license from Hong Kong’s securities regulator, paving the way for providing asset management services to both retail and professional investors.

UP Fintech hasn’t exactly abandoned the Chinese market, although its activity was limited after the China Securities Regulatory Commission (CSRC) said that, like Futu, they were allowing their China-based customers to carry out cross-border transactions without a brokerage license required. Both companies have since been in a state of suspended animation, ordered to stop accepting new customers in China without being forced to close the accounts of existing Chinese customers.

UP Fintech had a long period to prepare for the bombshell news. Back in 2016, the CSRC ordered one of the company’s entities in China to stop working with other companies not licensed to provide securities services in the country. In response, UP Fintech has taken steps to position the unit as an online provider of investor information in China, rather than a provider of full-fledged financial services such as securities trading.

Thus began UP Fintech’s focus on overseas expansion, often using acquisitions as a shortcut to enter new markets. It is not yet clear whether the CSRC will ultimately grant securities trading licenses to UP Fintech or Futu. Some see the fact that the companies have not been ordered to close all of their mainland China-based accounts as a positive sign, and neither company has indicated that it believes such an outcome will happen anytime soon.

While UP Fintech has moved its base to Singapore, Futu has focused more on Hong Kong, although it has also ventured into Singapore and the US. In its latest move to expand into Hong Kong, Futu last week announced purchasing a 44% stake in Airstar Bank, an online bank, for HK$440 million ($56 million).

UP Fintech’s revenue grew much faster in the first quarter than Futu’s, which increased by a more modest 3.7%. But UP Fintech’s revenue base is much smaller than Futu’s, meaning it still has a lot of catching up to do. This large catch-up distance could be reflected in UP Fintech’s relatively low price-to-sales (P/S) ratio of 2.7, which is well below Futu’s 8. This gap could narrow if UP Fintech’s overseas efforts continue to bear fruit. The jump in its shares after the first-quarter earnings announcement appears to be a vote of confidence from investors in the company, although faster progress may need to be made to further close the valuation gap.

This article comes from an unpaid freelancer. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.

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