Futu, UP Fintech: Analyzing Their Online Brokerage Industry

Summary

• FUTU and TIGR are mobile-friendly brokerage platforms that mainly provide services in China.
• Both companies will benefit greatly from the growth in China's offshore securities retail market and the affluence of its people.
• However, there are also very real business and political risks lurking around for FUTU and TIGR which the article narrows down on.

Photo by monsitj/iStock via Getty Images

Soaring Share Prices

Futu Holdings (NASDAQ:FUTU) and UP Fintech Holding (NASDAQ:TIGR) are investment holding companies which are engaged in offering digitalised, mobile-friendly brokerage platforms. FUTU and TIGR operate low-commission brokerages mainly in China under the Futu NiuNiu and Tiger Trade names, respectively.

Over the past year, FUTU and TIGR's share prices sky-rocketed as investors took notice of the companies' spectacular growth rates. Since FUTU and TIGR are mainly involved in providing low cost brokerage services, many investors have also labelled them as the "Robinhood of China."

Data by YCharts

As FUTU and TIGR operate very similar businesses in an almost identical environment, this article seeks to analyse the potential of the low cost, online brokerage industry which both companies operate in, the risks involved and whether there is still room for growth in both companies' share prices.

Business Segments

Before I dive into the analysis, let's take a look at how FUTU and TIGR make money. Both companies operate in three main business segments:

1. Brokerage Commissions - Driven by trading volume & commission rates
2. Net Interest Income - Interest income & financing service fees related to margin trading, securities lending and borrowings
3. Other Revenues - Revenue from IPO distribution service (underwriting and new share subscription services), income from market data service & employee share option plan (“ESOP”) management service income, etc.

As of FY20, the main revenue driver for both companies are brokerage commissions (64% of total revenue for FUTU, 60% for TIGR) followed by interest income and lastly other revenues. Over the past three years, the proportion of commission revenue to total revenue for both companies have been decreasing as a result of diversification.

Market Reach Target Market

FUTU and TIGR's main markets are in mainland China and Hong Kong. In recent years, both companies have started to expand abroad to countries such as Singapore and the US.

Target Demographic

FUTU and TIGR's users are primarily high earning and young clients. The median age of FUTU's customers is 34 while 70% of TIGR's clients are younger than 35.

Value Proposition To Customers

In the US, Robinhood gained widespread popularity as they were seen to have "democratised investing" for the common man, making it cheap and easy for anyone to invest. While this is also somewhat true for FUTU and TIGR, they actually address a larger gap in Chinese market, which is what makes them so popular, resulting in customer accounts growing exponentially.

Both founders of FUTU and TIGR had a common aim, to make it easier for Chinese investors to invest globally. Many Chinese investors desire to invest in global markets for many reasons:

• Top Chinese companies such as Baidu (BIDU), Alibaba (BABA) and Tencent (OTCPK:TCEHY) were listed in US and Hong Kong
• The Shanghai and Shenzhen exchanges have fewer growth companies due to a heavier concentration of traditional financial and industrial companies
• Diversification purposes

However, most investors were unable to invest globally as traditional brokerages were difficult to use and catered towards higher net worth clients. Therefore, TIGR and FUTU sought to address this gap which their mobile focus, low cost, global investment platform.

Competitive Advantage

Despite being relatively new companies, FUTU and TIGR have been working hard to carve out a moat for their businesses. We can observe a possible competitive advantage in these two aspects.

1. Network Effect

Apart from brokerage services, FUTU and TIGR have their own in-app community whereby investors can discuss about various topics such as market trends, investment opportunities and share their portfolios. As the community grows and engagement increases, more investors would want to join the platform to benefit from the content. This will result in more customer-created content and the cycle repeats, creating a network effect.

In December 2020, an average user spent an average of 37.8 minutes per trading day on FUTU's platforms, up from 24.5 in 2019. On the other hand, TIGR reported an uptick in English posts on its platforms, showing that its new overseas customers are actively joining the community.

2. Switching Costs & Brand Loyalty

Both FUTU and TIGR have quarterly retention rates of ~98%, meaning that almost all of their customers are sticking to their platforms. This could suggest that there are relatively high switching costs (e.g. require to transfer positions or liquidate assets before moving, difficult to trade without the community's input) and/or customers have a strong trust in FUTU/TIGR's services and platform, therefore they decide not to switch brokers.

I would note that since there are no huge competitors (apart from each other), this customer loyalty has not yet been truly tested as customers may jump ship if a new broker offers lower rates.

Competitive Advantage Still Weak

Overall, it is evident that FUTU and TIGR are putting a lot of emphasis on retaining customers and creating a strong business moat, which is good for investors. However, both companies are still relatively new therefore I believe its network effect is still developing, while we have yet to see customer loyalty and stickiness when met with more competition.

I believe that in the long run, should FUTU and TIGR continue developing their community channels and offerings, they will be able to create a sustainable wide moat but for now, I will still classify their competitive advantage as narrow.

Growth Trends

Moving on, let's take a look at the growth trends that are fueling the rapid growth of both companies.

Growth In Chinese Affluence

Between 2015 and 2030, the proportion of affluent Chinese (high & upper middle) is expected to rise from 10% to 35% of the total population, representing a 3.5x increase. Using China’s population of 1.4 billion, this results in a total addressable market of at least 490 million Chinese residences by 2030.

Source: The Economist Intelligence Unit

Growth In China's Offshore Retail Trade Volume

As mentioned at the start of the article, Chinese investors are increasingly interested in investing in external markets. Combined with an increase in wealth, this will result in a rapid increase in Chinese investments/trades in markets outside of mainland China.

From 2012 to 2017, the volume of trades in offshore markets attributed to Chinese traders grew by a CAGR of 90.8%. From 2018 to 2022, the CAGR is expected to remain high at 35.4%.

Source: oliverwyman.com

Rising Popularity In Wealth Management Products

Globally, pWc expects Assets Under Management (AUM) worldwide to increase to $145.5 trillion in 2025, up from $84.9 trillion in 2016, representing a 6.2% annual growth. Out of all the regions, Asia Pacific will experience the fastest growth of 11.8% per annum predicted from 2020 to 2025.

This growth comes at a good time as FUTU and TIGR are expanding into the wealth management business. With a rising popularity in wealth management products, they will be able to attract more customers or cross-sell existing customers.

Evaluation On Growth Trends

FUTU and TIGR operate in industries that are experiencing secular growth trends. This means that the company has very strong tailwinds that will help to propel its growth. An expanding market coupled with both companies aggressively acquiring more customers justifies the high growth rates (mid-high double digit %) expected.

Risks/Limitations To Growth

While the industries FUTU and TIGR operate are expected to experience strong growth, the same industries pose a substantial number of political and business risks.

Risks are also an important part of analysing a business and I feel that they are not talked about enough for FUTU and TIGR. Many articles I've read spend a large portion of time mentioning growth prospects but little time in assessing the impact and likelihood of the risks. In my opinion, a number of risks are real threats that investors should beware of.

Political Risks

1. Currency Conversion Regulations

Currently, the State Administration of Foreign Exchange (SAFE) strictly limits each citizen to convert a maximum of RMB equivalent of $50,000 USD into any other foreign currency.

TIGR & FUTU both have not acquired related licenses in mainland China, meaning that their retail customers are bound by this law. While both companies do not engage in currency conversion activities, they do not have control of how their clients convert the money. Therefore, if regulators clamp down on currency conversion practices and clients are using unauthorised avenues to do so, FUTU & TIGR could be summoned by regulators. If not, stricter clamp downs could affect trading volume in general.

PRC governmental control of currency conversion, cross-border remittance and offshore investment could have a direct impact on the trading volume facilitated by our platform. If the government further tightens restrictions on converting Renminbi to foreign currencies, including Hong Kong dollars and U.S. dollars, and/or deems our practice as in violation of PRC laws and regulations, our business will be materially and adversely affected.” — FUTU 2020 10-K

2. Not Officially Licensed In China

As mentioned, FUTU and TIGR do not have the licenses to operate in mainland China and instead use foreign entities and licenses to trade. Therefore, it is possible that the Chinese Securities Regulatory Commission (CSRC), the Chinese equivalent of SEC, may step in to make additional requirements.

The Chinese government has also stated that services provided by FUTU & TIGR are not protected by Chinese laws.

Business Risks

1. Commission Revenue Heavily Dependent On Trading Volume

Source: (L) NASDAQ, (R) Author’s compilations from FUTU & TIGR’s financial statements

The graph in grey depicts NASDAQ’s quarterly trading volume since 4Q18. Although I am unable to obtain the trading volumes of other US exchanges, this should be a good gauge of the trading volume of US equities since trading volumes of the different exchanges tend to follow a similar pattern. We can see that both FUTU and TIGR’s trading volumes closely match that of the NASDAQ. There was a slight dip from 2018 to 2019 and a sharp increase in 2020.

Since commission revenue is tied to the number of trades executed, fluctuations in the trading volume will directly impact commission revenues. Therefore, investors need to be wary of market cycles and the possibility of a fall in trading volume.

A decrease in trading volumes could be due to a multitude of uncontrollable factors such as political conditions, changes in markets, economic downturns and more. For example, Interactive Brokers saw a dip in transaction volume and commission revenue in 2008 due to the Great Financial Crisis.

Source: Interactive Brokers 2010 10-K

One factor that can potentially mitigate decreasing trading activity in downturns is by actively attracting new customers to deposit money and trade. This could be possible due to the high growth trends in China’s offshore securities market. However, in the Interactive Brokers example, customer accounts actually rose from 77k to 111k from 2007 to 2008, yet they were unable to offset the effects of an economic downturn and a pessimistic trading sentiment in 2008.

On a positive note, even though there will be fluctuations in trading volume and commissions, these temporary dips could create attractive buying opportunities if the brokerage still manages to maintain its fundamentals and increase the number of customers during downturns. However, it is important for investors to understand the volatile and unpredictable nature of the brokerage business and its direct impact on revenue. Investors should also be prepared that a prolonged market and economic downturn could lead to years of depressed trading volume and consequently reduced commissions.

2. Commission Revenue Could Be Unsustainable

Commission revenues are affected by two main factors:

• Trading Volume
• Commission Fees

This section will focus on the latter since we have already established the volatile nature of trading volumes. In terms of commissions charged, both FUTU and TIGR adopt a low commission strategy, which has successfully attracted millions of customers to their platforms. However, commission fees in general are experiencing a downward trend.

According to Statista, the industry average commission fee in mainland China decreased from 0.126% in 2008, to 0.03% in 2019. Looking globally, a few online brokers have even taken the lead to completely cut commission fees.

It is likely that commission fees will continue to decrease in the long run. FUTU and TIGR will be significantly affected as more than half their revenues stem from commission fees. To deal with the fall in commission revenue, FUTU & TIGR would either have to rapidly attract more customers, increase trading volume and/or reduce their reliance on commission fees by diversifying into other products & services. It will be important to keep close tabs on how FUTU and TIGR diversifies their revenue sources in the coming years.

3. Cyclical Nature Of Other Business Segments

Apart from risk arising from the volatile nature of commission revenues from trading, the other business segments which FUTU & TIGR operate or are expanding into are also mostly cyclical.

FUTU & TIGR's second largest business segment is margin financing and interest income. Margin financing and interest income are also dependent on the market cycle. In bull markets, investors tend to use margin more frequently as they believe the market will continue going up. On the flip side, investors tend to avoid margin in bear markets due to the worry of further crashes. To make things worse, if the market experiences a sudden crash, over leveraged investors could find themselves in a position that they are unable to finance their margin calls. Looking back at the 2008 Great Financial Crisis, we can see that Interactive Broker’s interest income crashed in the years following and took quite a while to recover.

Source: Interactive Brokers 2010 10-K and 2013 10-K

Therefore, it is likely that the interests income of online brokerages including FUTU and TIGR will follow a similar pattern. It will not be realistic to expect a straight line growth for this business segment over the next decade unless investors do not expect any significant market correction or downturn.

Another emerging business segments for both companies are fees related to IPOs such as underwriting and subscription fees. The number of IPOs per year also closely correlates with the stock market’s price and direction. From the diagram below, we can see that the number of IPOs peaked at the tip of market bubbles in 2000 and 2007 and significantly fell the following year as the market crashed. As the market recovered, so did the number of IPOs.

Source: Statista

The reason for this is simple. In bull markets, optimism is high and greed dominates. Investors become “irrational and are willing to pay fancy prices. In such a situation management would like to sell their stake to the public as they are getting more than the intrinsic value.” On the flip side, fear dominates and rationality prevails in bear markets. Investors will not be willing to pay any price just to own a company.

Since IPOs fluctuate with the market, so will FUTU and TIGR’s IPO related income.

4. Potentially Strong Competition

Currently, FUTU and TIGR’s strongest competitor is each other. Both companies are the leading low cost online brokerages in China. However, there are also many legacy brokerages in China who have been around for much longer and are much bigger in size than both FUTU and TIGR. The figure below shows the top 10 largest brokerages in the world. Out of these, 7 are Chinese companies!

Source: Bloomberg

Although China’s legacy brokers have a different set of target audiences — mainly the high net worth individuals, they could pose strong competition to FUTU and TIGR should they decide to enter the low commission brokerage business. Another source of competition would be new start-up entrants into this industry. As FUTU and TIGR currently do not have a strong competitive advantage yet, customers could easily switch over to other low-cost brokerages should they emerge.

The presence of more competitors could also lead to a price war. According to an IBD survey (figure below), cost is the main factor motivating investors to switch brokerages. Therefore, if new entrants can provide lower or even no commissions, FUTU and TIGR may find it difficult to keep their customers. Alternatively, they would also need to drop their rates, hurting revenue.

Source: Investors Business Daily

In recent years, FUTU and TIGR are starting to expand internationally. This is where they will face even more intense competition due to the presence of more established discount brokerages such as Interactive Brokers, TD Ameritrade, SAXO and more.

The competition overseas will be much more intense than in mainland China due to the number of players involved and the longer track record of those companies. However, FUTU and TIGR do have an edge as they focus on a mobile-first customer experience which is very attractive to younger investors. FUTU and TIGR could also “reduce” the competition by expanding into less penetrated markets such as Asia, where the other low cost brokerages are not as widely well known.

For the Chinese market, FUTU and TIGR should be able to maintain their foothold as it will take a few years for a new company to build up the necessary brokerage technology backbone to pose a significant threat to them, unless the company is backed by another technological giant. Therefore, the greatest risk in China would be the potential threat from legacy players. On a positive note, it seems that FUTU and TIGR understand the risk of strong competition as they have been focusing on developing customer stickiness by building community channels, discussion forums and enhancing the company’s brand name. In the long run, this should help both companies better withstand competition.

So What Should Investors Do?

The risks mentioned are very real and there is a rather high possibility of them being realised. Notably, there is a very high chance of a market downturn occurring within the next few years given the overvalued nature of the market today. When this occurs, FUTU and TIGR’s near term growth would likely be decimated and the share price could collapse. On the other hand, threats from regulations and competition could also hamper and slow down growth. Likewise, there is also the possibility that none of these play out.

Therefore, after assessing the growth and risks of FUTU and TIGR’s businesses, the key takeaway to investors will be: Do NOT pay an inflated price for these companies! The growth prospects are very attractive and I believe that both companies will be able to expand and improve profitability in the long run. However, the risks are very real too, therefore we should offset this risk with a higher margin of safety.

How Could A Market Crash Impact FUTU & TIGR

Let me dive in a little more into the most probable threat to FUTU and TIGR’s growth — A market crash. Historically, a market crash has caused falling trading volumes as well as a reduction in the number of retail investors. From the graph below, we can see that the percentage of households invested in the US market peaked at 65% prior to the GFC. Following the crash, the number of retail investors continued to fall for years, reaching a low of 52% in 2013. Furthermore, the demographic with the largest drop in stock market participation was the millennials. With this precedent, a crash of the same magnitude could “wipe out” a large number of young retail investors, who are FUTU and TIGR’s main target audiences.

Source: 20 Something Finance

However, it is also worth noting that times have changed. The young investors of today are a totally different group from the millennials a decade ago. As a result, they will have different sets of risk tolerance and investment styles. With the democratisation of finance and readily available investment information, advice and forums online, there is a possibility that the newer generation of investors are more prepared for a crash and better understand how to react or even benefit from one. Therefore, trading volume might not be very badly affected should this situation play out.

Ultimately, in the event of a market crash, we do not know which scenario will play out (although history leans towards the former), therefore it is difficult to assess the potential impacts on FUTU and TIGR. This brings me back to my previous point on the importance of a margin of safety when purchasing FUTU and TIGR. It is always better to be safe and price the potential risks through a higher margin of safety, instead of being sorry after paying a high premium just because of high growth.

Volatility Brings Opportunities

Looking at it from another angle, the highly volatile and cyclical nature of FUTU and TIGR’s revenues could also create a number of buying opportunities, when the share price is unfairly beaten down due to negative sentiment surrounding the market. Looking at Interactive Brokers, the share price saw huge declines in 2008-2009, 2018 of ~50% and a COVID-19 induced 25% fall in early 2020. All these huge drops corresponded with negative market sentiments and falling trading volumes in the broader market.

Source: Google Finance

Similarly, I believe that there will be instances whereby FUTU and TIGR are unfairly punished by the market due to a downturn whereby investor confidence falls and the trading outlook seems bleak. When these opportunities arrive, they could be a very attractive entry price if FUTU and TIGR’s fundamentals remain intact or continue to improve.

Therefore, more conservative investors could choose to wait for a market pullback to obtain a bargain entry price, or incrementally add positions to FUTU and/or TIGR (buy some now, buy more during market crashes).

Quick Valuation

To conclude the article, I will provide a quick valuation of FUTU and TIGR to assess whether they still have more room for growth. For this, I will be using the P/S multiple.

The table below shows the P/S figures of other high growth companies in a similar industry. Note that Robinhood's P/S ratio is calculated assuming a 2020 revenue of $673 million, with a current valuation of $20 billion.

Source: Author’s compilations

For FUTU and TIGR’s valuation, I will conservatively use a multiple of 25 for FUTU and 20 for TIGR. The lower multiple for TIGR is because its growth rates are slightly lower than FUTU, hence investors will likely be willing to pay a higher premium for FUTU.

Source: Author’s calculations

Currently, TIGR is trading at around $17/share which is close to its intrinsic value when using FY20 revenue. Using forward revenue, TIGR is almost 50% undervalued.

On the other hand, FUTU is trading at around $135/share, at a slight 20% discount to FY21 intrinsic value.

Therefore, based on a valuation standpoint alone, TIGR seems to be much more undervalued than FUTU and can be bought with a larger margin of safety.

Future Analysis

In this article, I have mainly talked about the similarities of FUTU and TIGR, analysed the market they operate in as well as the business and political risks to their growth. In a future article, I will deep dive into the differences between both companies and whether FUTU's higher market valuation (relative to intrinsic value) is justified.

Analyst’s 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.

Comments

[my_symphony2003]

Both are now selling at a pocket change, it's time to load up IMO.

[StrawberryDream]

Thanks for the interesting article.Any potential currency conversion clampdowns worry me the most.
and could be the biggest systemic risk.It could revalue the companies downwards by multiples in no time like with the private tutoring companies.

China are already clamping down on Bitcoin, loosening Hong Kong’s listing regs and i doubt xi is too keen on Chinese investing the country’s money overseas.

Robinhood seems like it will be a ride when it lists with circa 20% of ipo stock going to robinhood account holders.Big valuation too.

[mike in montana]

If Xi decides party control above all is the only priority and it looks like he is, all bets are off. He will destroy anyone or thing in his path, including economic well being for his people. This won't end well for this megalomaniac or China itself.

[Sam_12]

Morgan Stanley issued an 'overweight' on FUTU when it was trading at $125.00,and I took a position sort of knee-jerk. I hadn't done due diligence, but I had some money to invest. Since buying in, I've seen the stock price go up nicely. Then I ran onto this article. I'm actively studying the stock. It might have legs to go above $200.00 this year, which would represent some nice unrealized gain. Thanks for the article. I started following you in the last week or so. All the best!

[Jovan Lee Yuheng]

@Sam_12 Thanks for the comment, hope the article helped! Ultimately doing ur own research is still the most impt because as long as u have conviction, it wouldn’t matter what other say when the stock fluctuates!

[Sam_12]

@Jovan Lee Yuheng I agree 100%. I've bought stocks which were recommended, but even though I bought the stocks, I didn't believe in them. I ended up selling them only to see them take off after I had moved on. This has happened at least a couple times. I try to make myself a better investor, but it's a process!

[Kanzi]

Thanks Jovan for this Artikel. I am also happen to look at these 2 companies and tend to agree that TIGR seems to be undervalued comparing with Futu based on stated numbers. But do you have any insights how homogeneous are their services, e.g. is there any other factors apart from growth rate to justify Futu‘s currently higher valuation? Thanks

[Jovan Lee Yuheng]

@Kanzi Hi apologies for the late reply! I was surprised to see new comments in this article since it was a while back! U raised a good question. One reason for the higher valuation of FUTU could be that it has a stronger network effect since it’s backed by Tencent. Since it can be integrated w Tencent’s network, it will be exposed to the over 1.2b MAUs of Tencent. This would be very beneficial to user acquisition in China compared to TIGR. As mentioned in the article, I am actually planning for a follow up to compare FUTU vs TIGR w a more in depth comparison on their differences, this article should be out within the next month or two so do keep a look out too :) Thank you!

[Kanzi]

@Jovan Lee Yuheng
Hi Jovan, great, looking forward for your next publication: )

[brucemurison]

@Jovan Lee Yuheng Looking forward to your comparison article.

I am curious what Tiger has planned for the US. I have an account with Marsco, but that platform is USA markets only. Integrating everything to access Asian markets would enhance their appeal, but I have not heard if that is in their plans.

I am hoping that Tiger, Futu, or someone, will offer a full international brokerage, in other words, a simplified, user friendly version of IB. I do not see Webull moving in that direction, at least not yet, as their strategy seems to be getting overseas customers, especially in Asia, to open accounts to trade US markets.

This is a very interesting area and I appreciate your coverage.

All the best.

Bruce

[NJIN]

Have you tried futu platform? it is a rubbish company...several products are not in, they dont have any serious clients. tiger is cheap at this level. buy

[Jovan Lee Yuheng]

@NJ08 Assets I have tried FUTU’s moomoo since that is available in Singapore where i live. It’s not bad and I like some of its features e.g. the presence of ownership breakdown, but personally I do like TIGR’s interface and ease of navigation slightly more!

[antoniocn]

ir.itiger.com/...

[Nic111]

Based on my forecast, Tiger should have 450,000 funded accounts by end of 1Q2021. Average user's funds in Tiger is around US$60,000. Adding to funds already in Tiger, this brings us to at least US$25 billion. Tiger is growing aggressively in Singapore. They are working on a few initiatives like HK license, etc. Yes, there are risks to the businesses but no one can call a top of the equity market. The so called average user in China cannot deposit too much funds in the account any way, so the big risk of not obtaining china license is there but is not as scary as you have mentioned. For other jurisdictions, Tiger has obtained the license in Singapore as well as a few other nations, including New Zealand.

With the Singapore license, the funds are segregated and not comingled in the same corporate account of Tiger Brokers. This is a regulatory point as part of the license. Tiger's customer funds are in DBS....

I believe alot of people here do not have sufficient knowledge of Tiger Brokers. Risk pertains to not knowing what you do not know... Of course, in terms of fund allocation, must always think of risk management as there is no sure bet that there is 100% right. As always, the above should not be construed as investment or trading advice.

[Nic111]

@Nic111 Tiger Brokers has allowed the trading of bitcoin and eth.. Its more innovative and nimble compared to Futu

[Brizza]

@Nic111 Absolutely agree with your comments (apart from the aggressive forecast of 450k funded accounts by 1Q2021 - of course I have the benefit of hindsight!). I agree with your comments around not many people having sufficient knowledge of Tiger Brokers and would extend that to include professional investors/analysts given its relatively small market cap (compared to other financials in the region) I suppose. And therein lies the opportunity. I believe Tiger will easily beat consensus earnings expectations (currently 52cps for FY21e - I have 70cps, 73cps for FY22e - I have 172cps etc). As the company grows aggressively and beats earnings expectations, I would expect strong share price growth, increased analyst coverage and greater investor attention on the stock (similar to Futu's experience).

[kalu0003]

If you want to lose your own hard earned cash/money - I strongly encourage you to go with TIGR or FUTU. China wealth management regulations are at best none existent. Its all over the board. My 2 cents.

[Cognoscente]

Eastmoney is also among the best, I think. And there is another big problem with investing overseas for mainlanders, i.e. money flowing outbound and inbound is not comfortable as there is restriction.

[kalu0003]

Stocks are cheap for a reason. I always stick with the best of the breeds even if it means paying for a higher price. My 2 cents.

[Jovan Lee Yuheng]

@kalu0003 Thanks for your comments! I agree with your comment too that high quality businesses do not come cheap, but for me I try to be on a lookout for either fairly priced good businesses or good businesses that have been overlooked for some reason e.g. negative sentiments etc...

For TIGR and FUTU since I am aware that a market downturn could potentially depress share prices, I would not stake a huge position in yet since I believe a downturn could be imminent and I could have a bargain price! Of course, there is also the opportunity cost in holding cash which is why I continue to research many companies. Cheers!

[Doctor Dividend]

I don't understand how you come up with a P/S of 20 and 25. In my article on Voyager Digital, seekingalpha.com/... I use the historical P/S of SCHW and IBKR to determine a reasonable range because they are in the financial broker world. Even COIN, if it hits $4B in revenue for 2021, is now trading a P/S of about 13. I think the max one should use is a P/S of 15, but more realistically 10 if it's super high growth, and P/S of 5 if traditional growth. Even with a generous P/S of 15, it's not worth it, especially when one throws in that it is a Chinese company, so you really don't know what the actual numbers are.

[Jovan Lee Yuheng]

@Doctor Dividend P/S multiples are very dependent on growth which is why I cautioned that a market downturn could lead to very depressed multiples. E.g. If the market crashes and growth stalls for FUTU and TIGR, the market could easily value it at a P/S of 5 in the near term since they are not expecting any growth in trading volumes!

P/S multiple was obtained by calculating the average of only "high growth companies". It is not right to use the historical P/S of SCHW and IBKR as they are no longer in the fast growing stage therefore P/S is more depressed.

I have actually done a theoretical 2030 valuation for both companies which I would post in a future article which assigns IBKR's 10 year average P/S to both companies, as I believe that both FUTU and TIGR will reach a more mature stage, similar to IBKR a decade later. But for now I do not think it is fair to assign the P/S of companies in a "mature" stage to companies in "high growth" stage. There is definitely a premium for growth and this premium differs for investors. For example, if company A trades at P/S of 20 but doubles its revenue for the next two years, its P/S 2 years later will be 5, vs company B, current P/S of 10 but growths at 10% a year, two years later, its P/S will be 8!

Growth is definitely very uncertain esp in the brokerage business (and Chinese companies for some investors), which is also why I advocated a larger MOS base on the different risk appetite for investors!

Thanks for your comments and cheers!

[Brizza]

@Jovan Lee Yuheng Completely agree with your comments around applying different multiples to companies with different growth prospects - makes absolute sense when you think of what valuations might look like 2 - 3 years down the road as you highlight. In value Tiger on a DCF basis - the company is now profitable and is unlikely to go back into the red given growth in customer numbers, diversification initiatives and cost savings from self-clearing etc - and use the current valuation multiples of the mature US brokers as the exit steady-state multiple 10 years out.

[SPAC Junk-lover]

FUTU lied about its commission charge.

[Jovan Lee Yuheng]

@SPAC Junk-lover They charge both platform and commission fees, think most investors thought that they only charge $0.99 commissions but omitted the $1 platform fee. When using Tiger initially I had also overlooked that!

[SPAC Junk-lover]

@Jovan Lee Yuheng WHAT YOU SHOULD DO IS ASK FOR THAT money back.
if it refuses, you file FINRA arbitration case against it. Then, it has to pay you $5000 to settle.

[Jovan Lee Yuheng]

@SPAC Junk-lover The platform fees were actually stated on the website upon checking so it was my oversight when looking at the promotional advertisements. Good lesson learnt I guess, so when FUTU entered the market here I made sure to double check on the fees!

[Convoluted]

Reference is made to the effect that the investor today is very different from the millennial of 10 years ago. Are you claiming that Gen Z age group is more financially literate? If so, that would seem to suggest that Gen Z types are more astute (relatively speaking and adjusting for time).

That doesn’t seem logical, given the woeful state of our educational system. But, my own observations in dealing with younger people in their early 20’s or so is that they do appear to be brighter-and more outgoing. That is a bit perplexing. But, certainly a welcome development.

[Jovan Lee Yuheng]

@Convoluted Not making any definite claims, just stating that it is also a possibility. In my personal experiences, I would believe that they are slightly more astute but many younger "investors" are still too speculative and buy stocks w/o any basic understanding (see reddit forums, chat groups I am in etc...). So ultimately I believe there is still a majority that will be wiped out in a downturn but there would also definitely be more who are well prepared than previous generations given the materials available now (books, online reading, online courses etc...)

[Convoluted]

@Jovan Lee Yuheng

I’m sure my limited observations are statistically insignificant.

[synergen]

Well written with good insights!
Thank you!

[Jovan Lee Yuheng]

@synergen Thank you!

[Zmija]

For me, the biggest risks are the possibility of being delisted in US and the management accountability. I've been cheated of my money by legitimate Chinese businesses that got delisted 2 times so no more.

Jovan, it would be great if you can write also about businesses from other countries.

[Jovan Lee Yuheng]

@Zmija Good points, I was thinking about brining up the risk about delisting but in my previous article on Alibaba I had already mentioned it so I didn't include it here oops. Think the risk of being cheated is real, but for FUTU and TIGR they have established backing in Tencent and Interactive Brokers therefore I believe this risk is much smaller since those companies will have likely done their DD. Without such backing, I would have likely skipped analysing these two companies.

Then again, for smaller cap smaller stocks which seem riskier, I would allocate a smaller proportion of my portfolio to it so I can benefit from the potential growth yet even if the worse happens (e.g. its all a scam), the impact is smaller.

On your final point, I have noticed that my analysis are mainly on Chinese companies too! I do research on other companies too such as South East Asian companies which I do not post here as the ticker is not available, as well as other Western companies too. Now that you have mentioned, I think its a good time to revisit those companies too :D

Appreciate your comments, cheers!

[jakefountain]

@Jovan Lee Yuheng Tencent is not directly listed on US exchange. It’s listed as an ADR on the pink sheets exchange. It is up almost 300% in last 5 years. Not sure what the big deal is if a company gets delisted.

These stocks look interesting. For me I am going to stick to what I know which is BABA and JD.

[Jovan Lee Yuheng]

@jakefountain Yep, u can buy Tencent directly from the HK exchange, have stated in my article but the confusion could have arose from the OTC ticker in the article. BABA and JD are good choices! Hoping for the negative sentiments to go away soon so Chinese stocks can rise according to fundamentals again :D

[deadhead213]

I read TIGR is getting ready to introduce their own version of Chinese SPAC’s. Quite interesting

[SPAC Junk-lover]

@deadhead213 it did. TUGCU=9.85. below $10 so it is a good bet you won't ever lose money on it. small float

[deadhead213]

@SPAC Junk-lover I liken TIGR to ETrade, which attracted lots of young investors 20 yrs ago. I believe watching tigr these past few months, it’s definitely going to continue to grow and expand. I also feel it’s a prime candidate to be bought out by the likes of Schwab or international brokers

[SPAC Junk-lover]

@deadhead213 tigr has some problems.
it won't let you do good til cancel order. it won't let you sell (covered) a lot of outs or calls.

FUTU is bad too, lying about its commissions.

Webull much better. it is not a public company yet. I think Webull has much more accounts. It is mainly a US company. recently, it made a big push for Chinese customers to open US based accounts. FUTU & TIGR don't let Chinese open US based account yet (only HK account).