IPO Update: Up Fintech Readies Plan For U.S. IPO

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About: UP Fintech Holding Limited (TIGR), Includes: FHL, IBKR
by: Donovan Jones
Summary

Up Fintech (Tiger Securities) has filed proposed terms for its U.S. public market debut.

The firm has developed an online system to enable Chinese investors to trade foreign stocks.

While the firm is growing quickly, its growth and other financial metrics trail that of direct competitor Futu Holdings and the IPO is excessively valued.

Quick Take

Up Fintech (TIGR) intends to raise $78 million from the sale of ADSs representing Class A shares, per an amended registration statement.

The company has developed an online securities trading system for Chinese investors.

TIGR is growing more slowly than direct competitor Futu Holdings (FHL), has materially worse financial metrics, and the IPO appears richly valued.

Company & Technology

Beijing-based Up Fintech was founded to enable Chinese clients to more easily trade overseas stocks on U.S., Hong Kong, and other foreign exchanges.

Management is headed by CEO Tianhua Wu, who has been with the firm since 2018 and was previously was CEO of Ningxia Rongke.

Principal shareholders include CEO Wu, who will have controlling voting power after the IPO and People Better, Tiger Holdings, IB Global Investments, and Jager Fintech Holding. IB Global Investments is likely the investment arm of Interactive Brokers Group (IBKR).

Customer Acquisition

TIGR offers its services through both a website and mobile app and the firm’s business model is to generate commission fees for securities trading transactions as well as earning interest income related to margin financing.

Management claims its service is the ‘largest online platform for trading U.S. securities focusing on Chinese investors globally in terms of trading volume in 2017, with a market share of 58.4%.’

The firm targets the ‘young and affluent’ demographic and as of December 31, 2018, 71.5% of its individual customers were under 35 years of age.

The system has also been developed to provide an ‘interactive investment community’ that it believes creates a ‘virtuous cycle where users gain knowledge through our community, become increasingly engaged in investing, and therefore have more insights and experience to share.’

Management says it has more than 1.6 million registered users on its platform as of December 31, 2018, but didn’t say what its MAU or Monthly Active User results were, so we don't know how active those users are.

Sales and marketing expenses as a percentage of revenue have been decreasing as revenues have increased, as the figures below indicate:

Marketing & Branding

Expenses vs. Revenue

Period

Percentage

2018

31%

2017

37%

2016

63%

Sources: Company registration statement, IPO Edge

The firm stated its conversion rate into customers was 15.2% and the retention rate was 81.8% as of December 31, 2018, and for the year 2018, respectively.

According to a Bloomberg report, ‘Chinese investors have been pouring more of their money into overseas markets since the 2015 stock-market crash...the yuan’s 9 percent decline against the dollar over the past six months has made it even more attractive to hold assets in foreign currencies.’

Separately, Futu Holdings (FHL) also targets Chinese investors for its securities trading and wealth management platform, so it appears both firms are gearing up to compete even harder with expanded resources.

Financial Performance

TIGR’s recent financial results can be summarized as follows:

  • Growing topline revenue but at a decelerating rate of growth
  • Increased operating losses
  • Negative gross margin
  • Sharply negative and worsening EBITDA
  • Increased cash used in operations

Below are relevant financial metrics derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

2018

$ 33,560,265

98.0%

2017

$ 16,949,184

209.5%

2016

$ 5,475,837

Operating Profit (Loss)

Period

Operating Profit (Loss)

% Variance vs. Prior

2018

$ (46,892,114)

2017

$ (9,015,210)

2016

$ (13,704,080)

Gross Margin

Period

Gross Margin

2018

-139.7%

2017

-53.2%

2016

-250.3%

EBITDA

Period

EBITDA

EBITDA Margin

2018

$ (43,544,969)

-129.8%

2017

$ (7,943,564)

-46.9%

2016

$ (12,644,683)

-230.9%

Cash Flow From Operations

Period

Cash Flow From Operations

2018

$ (21,171,600)

2017

$ (8,510,634)

2016

$ (11,502,794)

Sources: Company registration statement, IPO Edge

As of December 31, 2018, the company had $34.4 million in cash and $17.0 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2018, was a negative ($32.0 million)

IPO Details

TIGR intends to raise $78.0 million in gross proceeds from an IPO of 13 million ADSs representing Class A underlying shares at a midpoint price of $6.00 per ADS.

Each ADS will represent 15 Class A ordinary shares.

Class B shareholders, which are primarily the founder and CEO and his family, will be entitled to 20 votes per share.

Multiple classes of stock are a way for management or existing investors to retain voting control of the company even after losing economic control.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

An existing shareholder, IB Global Investments, likely the venture arm of Interactive Brokers, has indicated an interest in purchasing up to $7 million of Class A shares at the IPO price.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $762.3 million.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 9.77%.

Management says it will use the net proceeds from the IPO as follows:

for general corporate purposes, which may include investment in product and technology research and development, sales and marketing activities, technology infrastructure, capital expenditures, and other general and administrative matters;

to set up entities and apply for operating licenses in multiple jurisdictions to expand our customer base and better serve them with global investment products;

to satisfy the increased capital adequacy requirements pursuant to the New Zealand Stock Exchange or regulators in other jurisdictions; and

for the acquisition of, or investment in, technologies, solutions or businesses that complement our business, although we have no present commitments or agreements to enter into any acquisitions or investments.

Management’s presentation of the company roadshow is available here.

Listed bookrunners of the IPO are Citigroup, Deutsche Bank Securities, AMTD, China Merchants Securities [HK], and Tiger Brokers.

Valuation Metrics

Below is a table of relevant capitalization and valuation metrics:

Measure [TTM]

Amount

Market Capitalization at IPO

$798,199,246

Enterprise Value

$762,320,542

Price / Sales

15.80

EV / Revenue

15.09

EV / EBITDA

-14.81

Earnings Per Share

-$0.38

Total Debt To Equity

0.18

Float To Outstanding Shares Ratio

9.77%

Proposed IPO Midpoint Price per Share

$6.00

Net Free Cash Flow

-$31,951,632

Sources: Company Prospectus, IPO Edge

As a reference, TIGR’s clearest public comparable would be Futu Holdings (FHL), which recently went public in the U.S.; shown below is a comparison of their primary valuation metrics:

Metric

Futu Holdings (FHL)

Up Fintech (TIGR)

Variance

Price / Sales

9.31

15.80

69.7%

EV / Revenue

14.43

15.09

4.6%

EV / EBITDA

79.40

-14.81

-118.6%

Earnings Per Share

$0.09

-$0.38

-517.5%

Sources: Company Prospectus, IPO Edge and Sentieo

Expected IPO Pricing Date: March 19, 2019.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.