Kerrisdale Capital, an investment management firm, published its second quarter 2021 investor letter – a copy of which can be downloaded here. The fund talked about two Chinese companies, and the Chinese internet market as a whole in its Q2 2021 investor letter. You can view the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of Kerrisdale Capital, the fund mentioned UP Fintech Holding Limited (NASDAQ: TIGR), and discussed its stance on the firm. UP Fintech Holding Limited is a China-based online brokerage firm, that currently has a $2.7 billion market capitalization. TIGR delivered a 112.22% return since the beginning of the year, extending its 12-month returns to 205.25%. The stock closed at $16.85 per share on August 04, 2021.
Here is what Kerrisdale Capital has to say about UP Fintech Holding Limited in its Q2 2021 investor letter:
“We are long shares of UP Fintech (“TIGR”), the holding company of Tiger Brokers. TIGR’s shares have retreated dramatically since early July with the recent escalation of regulatory pressure and fears brought on by DIDI’s IPO. Since the end of June, TIGR’s shares have fallen -44% and have dramatically underperformed the KWEB ETF (-26%) and its direct peer FUTU (-41%). In our view, this has left TIGR’s shares significantly undervalued (23x P/E on 2022 street numbers versus peer group average 35x) ahead of what should be strong operational results and a materially positive catalyst in the company receiving a Hong Kong securities license.
We believe Tiger has a long runway for continued growth. Though China is famous for its high savings rate, households have tended to invest in real estate and bank deposits, with equities accounting for a much smaller fraction of total wealth than in Western developed markets. But as more Chinese investors, especially young ones, become familiar with global capital markets, portfolios are shifting, freeing up a gargantuan addressable market. Already, Chinese household wealth totals $78 trillion, and we estimate that in 10 years it will exceed $200 trillion – almost twice the current US level. There will be room for multiple online brokerages worth tens of billions of dollars, and we believe Tiger – currently valued at $2.7 billion – will be one of them.
Though the business model remains fairly simple – revenue is dominated by commissions (65% of the total in the latest reported quarter) and net interest income, primarily derived from margin loans (20%), with expenses dominated by the cost of software engineers – Tiger has begun to expand into adjacent business lines, including IPO underwriting (helping its customers gain early access to newly US-listed Chinese companies) and the management of employee stock ownership plans (serving many of those same companies). To be sure, Tiger has competition, primarily from Futu, another up-and-coming China-focused low-cost online broker. But with such a large and rapidly growing addressable market, competition hasn’t stopped Tiger from
consistently winning new business.The temporary pullback in Chinese ADR IPOs is a manageable issue – other revenue, which is primarily revenue from US ADR and Hong Kong IPO underwriting, accounted for 16% of revenue in 2020, while consensus has other revenue falling to 11% of total revenue in 2021 and 8% of revenue in 2022. Even if there were no more US listings of Chinese companies, an unlikely scenario in our view, the financial impact on TIGR’s overall business would be manageable. We believe a number of these IPOs would still occur, just on the Hong Kong stock exchange instead of US exchanges. The economics of each deal would be lower for TIGR, but much better than a complete loss of revenue. We also note that the company’s FX exchange business, the smaller component of other revenue, should continue to grow due to the company’s expanding user base. Based on our analysis, even in a draconian scenario where there are no more ADR IPOs, we believe the direct hit to TIGR’s 2021/2022 revenue would only be a low- to mid-single digit
percentage impact.The issuance of a Hong Kong license is on the horizon – TIGR applied for an HK securities license in February of 2021 and remains confident that they will be granted this license before the end of the year. Being granted an HK securities license would have several positive benefits for the company’s operational and financial performance, including the ability to market to Hong Kong citizens directly and drive incremental net adds. Hong Kong is a large and lucrative brokerage market, and TIGR’s management is confident that it can be a material driver of net adds for the company. Further, TIGR’s monetization and profitability from HK securities trading and margin lending, which is currently done through a partnership with IBKR, would substantially improve. TIGR will also receive a higher allocation (and profitability) on HK IPO subscriptions.
TIGR continues to expand internationally outside of China at a rapid rate. TIGR began to expand its customer base outside China in mid-2020, and results to date have been fantastic. New international expansion outside of China is a significant driver of incremental growth and has taken over as the firm’s primary growth driver. In 1Q21, the company added a record 117k funded accounts with international accounts comprising over 50% of the total. The addition of over 59k international net adds was up dramatically from zero international accounts in 1Q20 and 18k new international accounts in 4Q20. We believe that most of the international net adds in 1Q21 were from Singapore, where TIGR launched their app relatively late in the quarter (3/13/2021). App download data for Singapore continued to be very strong throughout 2Q21, with TIGR being the #1 most downloaded iOS app in the finance category. Management guided for 350k net adds in 2021 with ~70% of those net adds coming from international arenas (mainly Singapore, USA, and Australia). We expect the contribution from geographic expansion to grow even further when TIGR gains a license to operate directly in Hong Kong and expands into new countries in Southeast Asia.
Goldman Sachs initiated coverage on TIGR with an unfair “Sell” rating on 7/14/2021 and a price target of $21.06. We believe that this analysis was predicated on backward-looking information, and fails to consider multiple positive changes to TIGR’s business which should continue to
improve its growth profile and profitability levels over the next several quarters and years. Additionally, while at the time of initiation the price target was +3% above where TIGR was trading, GS’s price target today is +18% higher than the current stock price.Goldman has an overly simplistic and erroneous view that FUTU, with its 8% market share of retail trading volume, has saturated TIGR’s HK client demographic, thus limiting potential share gain opportunities for TIGR. As a result, GS’s financial estimates in 2022 and beyond reflect minimal contribution from the company receiving an HK securities license. We note that GS is modeling 2022 net adds to be 40% below 2021 guidance, despite the expectation that the company gets access to HK. GS numbers embed minimal margin expansion despite several successful and ongoing internal initiatives to increase profitability, capture a higher share of internal self-clearing, and ongoing operational scale. GS believes that due to TIGR’s lower
operational scale, TIGR will need to continue investing in R&D and marketing in order to gain market share, thus limiting margin expansion. TIGR’s ROA is currently depressed due to a lower 3bps commission take-rate vs. FUTU at 6bps due to TIGR’s partnership with IBKR. We note TIGR expects to be self-clearing over 70% of their clients by the end of CY21, a big jump from currently clearing 30% of its clients. GS’s model calls for TIGR to have 23-25% net income margins through 2025 despite peer FUTU having >50% net income margins and TIGR’s guidance that calls for 50% long-term net income margins.Robinhood’s recent IPO signals the ongoing democratization of finance, creating a frictionless mobile experience that’s rapidly making investing a cultural phenomenon. Robinhood proved that the amount of tradeable wealth in the hands of relatively young and tech-savvy Americans was large enough to accommodate a new $30-billion player. The opportunity ahead in China’s nascent retail investing industry, with its tech-savvy millennials, is enormous. It’s time to step outside the HOOD and enter the TIGR’s den.”
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Based on our calculations, UP Fintech Holding Limited (NASDAQ: TIGR) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. TIGR was in 14 hedge fund portfolios at the end of the first quarter of 2021, compared to 8 funds in the fourth quarter of 2020. UP Fintech Holding Limited (NASDAQ: TIGR) delivered a -1.69% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.
