Earnings Call Transcript - TIGR Q2 2024

Aaron Li, Head of Investor Relations

Thank you, Desmond. Hello everyone and thank you for joining us for the call today. UP Fintech Holding Limited's second quarter 2024 earnings release was distributed earlier today and is available on our IR website at ir.itigerup.com, as well as GlobeNewswire services. On the call today from UP Fintech are Mr. Wu Tianhua, Chairman and Chief Executive Officer; Mr. John Zeng, Chief Financial Officer; Mr. Huang Lei, CEO of US Tiger Securities; and Mr. Kenny Zhao, our Financial Controller. Mr. Wu will give an overview of our business operations and discuss corporate highlights. Mr. Zeng will then discuss our financial results. They will both be available to answer your questions during the Q&A session that follows their remarks. Now let me cover the Safe Harbor. The statements we are about to make contain forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. A number of factors could cause actual results to differ materially from those contained in any forward-looking statement. For more information about factors that could cause actual results to materially differ from those in the forward-looking statements, please refer to our Form 6-K furnished today, August 30th, 2024, and our Annual Report on Form 20-F filed on April 22nd, 2024. We undertake no obligation to update any forward-looking statement except as required under applicable law. It is my pleasure to now introduce our Chairman and Chief Executive Officer, Mr. Wu. Mr. Wu will make remarks in Chinese, which will be followed by English translation. Mr. Wu, please go ahead with your remarks.

Wu Tianhua, Chairman and CEO

Hello, everyone. Thank you for joining the Tiger Brokers' second quarter 2024 earnings conference call. In the second quarter, the U.S. stock market continued to perform well, and overall market activity improved compared to the first quarter. This resulted in an increase in client trading volume across stocks, options, and futures, with commission income reaching $34.1 million, which is up 22.7% quarter-over-quarter and 54.9% year-over-year. This marks the second highest quarterly commission revenue in our operating history. Our total revenue for the second quarter was $87.4 million, an all-time high, reflecting a quarter-over-quarter increase of 10.8% and a year-over-year increase of 32.4%. In terms of the bottom line, our GAAP and non-GAAP net income attributable to UP Fintech was $2.6 million and $5.2 million, respectively. The bottom line was negatively affected by a loss provision of $13.2 million related to a case of Hong Kong stock pledging and withdrawal. Since 2023, we have ceased similar Hong Kong equity stock pledging and withdrawal in response to market conditions and risk, and there is no ongoing risk exposure among existing users. Excluding the loss provision's impact, our pre-tax profit for the quarter would have been $19.4 million, representing a 13.9% increase quarter-over-quarter and an 8.3% increase year-over-year. In the second quarter, we added 48,900 newly funded accounts, which is a sequential increase of 69% and a year-over-year increase of 68%. The Singapore and Southeast Asian regions were the main contributors. In the first half of this year, we added a total of 77,700 newly funded accounts, and we are confident we will meet our annual guidance of at least 150,000 newly funded accounts in 2024. Regarding client assets, net asset inflow remained robust in the second quarter, totaling $1.7 billion, primarily from the Singapore and Hong Kong markets. Boosted by a $3.6 billion market-to-market gain, total current assets at the end of the second quarter increased by 16% quarter-over-quarter and 121% year-over-year to $38.2 billion, an all-time high. We are pleased to see seven consecutive quarters of growth in total client assets, with new highs in the past three quarters. Importantly, client assets from the Hong Kong market doubled quarter-to-quarter, highlighting our ability to attract high-quality users in markets like Singapore and Hong Kong through an exceptional product experience and local expertise, while also demonstrating the significant growth potential in the markets we are currently focusing on. In the second quarter, we continued to enhance our product offerings by introducing a range of localized features. In August, we launched two key functionalities: Hong Kong stock options and short selling for Hong Kong stocks. Now we offer all major trading products for the Hong Kong market, boosting our competitiveness and appeal to local users. Looking ahead, we also plan to introduce the combo options strategy feature for Hong Kong stock options. Additionally, since our Hong Kong subsidiary officially uplifted its Type 1 license to include asset dealing service for professional investors in January of this year, we received approval in June to expand this license to retail investors in Hong Kong. We offer zero commission and no platform fees for both professional investors and Hong Kong retail clients to trade spot cryptocurrency on the Tiger platform, supporting real-time settlement of virtual asset transactions in U.S. dollars. This provides users with a truly secure, convenient, and cost-effective global trading experience. We are also pleased to report that after introducing the Tiger Vault debit card and contract trading feature in the Singapore market in the first quarter, we have received widespread positive feedback from existing users, leading to a significant increase in the number of newly funded accounts and cardholders, with notable improvement in both user activity and stickiness. In addition to launching new products, we continue to refine the user experience of our existing features. For instance, our overnight trading for U.S. stocks has now expanded to support up to 9,500 stocks and ETFs, offering greater convenience for clients to trade U.S. stocks and ETFs during local market hours and capture more market opportunities. Moreover, the Combo Option Strategy feature for U.S. stocks was upgraded in July to support full-leg options trade and execution based on net margin requirements, further enhancing trading strategy flexibility and margin efficiency. Our B2B business continues to perform well. In investment banking, we underwrote 12 U.S. and Hong Kong IPOs in the second quarter, including Laopu Gold and Dida, and we served as the exclusive lead bank for Tungray Technologies and YY Group's U.S. IPO. In our ESOP business, we added 22 new clients in the second quarter, bringing the total number of ESOP clients served to 579 by the end of the second quarter of 2024, which is an increase of 21% year-over-year.

John Zeng, CFO

Thanks, Tianhua Wu. Let me go through our financial performance for the second quarter. All numbers are in U.S. dollars. The market was more active in the second quarter compared to the first quarter. The trading commission reached $34.1 million, an increase of 23% quarter-over-quarter and 55% year-over-year. Total revenue reached an all-time high of $87.4 million, an increase of 11% quarter-over-quarter and 32% year-over-year. Cash equity's take rate was 6.7 basis points this quarter, slightly increased from 6.3 basis points in the last quarter. Within commission revenue, about 65% comes from cash equities, 30% from options, and the rest from futures and other products. Now on to costs. Interest expense was $13.6 million, increased by 30% from the same quarter of the last year, as we are in a higher interest rate environment. Execution and clearing expenses were $2.8 million, an increase of 38% from the same period of last year, primarily due to an increase in our trading volume. We continue to improve our clearing efficiency, with cash equity clearing expenses as a percentage of cash equity commission remaining around the lowest in the industry at about 2.1% this quarter. Employee compensation and benefit expenses were $28.6 million, an increase of 20% year-over-year due to headcount increases to strengthen overseas growth and R&D. Occupancy, depreciation, and amortization expenses decreased by 17% to $2.1 million. Communication and market data expenses were $8.8 million, an increase of 14% year-over-year due to the increase in the user base and IT-related services. Marketing expenses were $6.4 million this quarter, increased by 36% year-over-year as we saw that market conditions were more supportive for user acquisition and branding in the second quarter. General and administrative expenses were $20.2 million, an increase of 345% year-over-year, due to a $13.2 million loss provision we incurred this quarter. Total operating costs were $69 million, an increase of 52% from the same quarter of last year. As a result, our GAAP net income and non-GAAP net income for the second quarter were $2.6 million and $5.2 million respectively. If excluding the impact from the loss provision, our pre-tax profit for the same quarter would be $18.4 million, an increase of 14% quarter-over-quarter and 8% year-over-year. Now I have concluded our presentation. Operator, please open the line for Q&A. Thanks.

Hua Fan, Analyst

I will quickly translate my question. This is Hua Fan from CICC. I have two questions. The first one is that we see the U.S. stock market has been quite volatile in August, and Q3 has already been underway for two months. Can you show some growth rates over the past two months, such as the number of new users, client assets, and the impact on financial performance? Secondly, if we enter a rate-cutting cycle, how might Tiger adjust your business and what kind of impact would a 25 basis point rate cut have on the company's interest income?

Wu Tianhua, Chairman and CEO

Okay. I'll translate for the first question. In terms of client assets, net asset inflow in China was still strong in the first two months of the third quarter, and the number of newly funded users also continued the rapid growth we saw in the second quarter. If you look at the numbers in July, we witnessed the highest single month revenue in our operating history. While August has not yet completed, trading volume in August so far is also very active. September is a bit uncertain due to factors like the U.S. election and Fed interest rate decisions. But overall, we are quite satisfied with how Q3 has been shaping up so far.

John Zeng, CFO

A recap by the federal reserve may negatively impact our interest income, but we also believe we can increase market activities, leading to more active trading volume and commission income. Therefore, we will adjust our strategy based on the actual pace of the rate cut and market reactions, ensuring we find a balance among our commission and interest-related business and wealth management. If the rate cut is 25 basis points next month, our calculations based on our second quarter business scale and interest income suggest that the rate cut's impact on total revenue for the fourth quarter would be about 1%.

Cindy Wang, Analyst

Thank you for allowing me to ask questions. I have two inquiries. Firstly, I've noticed that this quarter's profitability was mainly affected by loss provisions. Could you explain the reasons for the allowance for receivables from customers? Additionally, what follow-up measures are being taken with clients and what are the chances of write-back? How likely are we to see similar growth provisions in the future? My second question pertains to the growth of new funded accounts in the second quarter. Could you provide a regional breakdown and elaborate on any new customer acquisition strategies implemented this quarter? Thank you.

Wu Tianhua, Chairman and CEO

This impairment was related to our Hong Kong stock pledging transaction business. To be cautious, we wrote off the full amount in the second quarter. We take this situation very seriously and are doing everything we can to recover the loss. We have signed a repayment agreement with the client, and a controlling shareholder is acting as guarantor. However, we chose to write off the full amount in the second quarter. If we receive repayment in the future, we will reverse this loss provision when the payment is made. Additionally, we had already halted our Hong Kong stock pledge business last year due to market conditions and risk before this incident occurred. This particular transaction continued because it remained under contract. After the event, we conducted a thorough review of our risk procedures and current stock planning transactions. Currently, there are no outstanding stock pledging or cash risk transactions using Hong Kong stocks as collateral. In the second quarter, approximately 65% of our newly funded clients were from Singapore and Southeast Asia, about 15% from the Hong Kong market, and around 10% each from Australia, New Zealand, and the U.S. We are very satisfied with these results, marking the best performance we've seen in the past 10 quarters regarding the number of new funded accounts. There are a couple of reasons we believe contributed to this growth. Firstly, the U.S. and Hong Kong stock markets performed well in the second quarter. We increased our market spending on branding and advertising by around 45% compared to the previous quarter, which helped increase new user numbers across various markets. Secondly, we experienced a significant boost from new products we launched in Singapore in the fourth quarter, such as the Tiger Vault debit card and contract trading features. The local demand for these offerings surpassed our expectations. By the end of August, we had approximately 10,000 Tiger Vault cardholders, primarily new funded users from the second quarter. Additionally, over the past three months, the contract trading feature alone has significantly contributed to our revenue and commission income. Therefore, we are observing substantial growth in not only user numbers but also trading volume and commission income in Singapore, both quarter-over-quarter and year-over-year.

Judy Zhang, Analyst

Let me translate my two questions. The first question is about the development in the Hong Kong market. What is the progress in the Hong Kong market, including the traditional brokerage business and the company's virtual currency business that now supports both retail and professional investor trading? What are the plans for this business in terms of pricing, customer acquisition strategy, and what results does management anticipate? The second question pertains to the progress of the company's wealth management business. What is the current scale, and are there any updates on product offerings? Thank you.

John Zeng, CFO

We are very satisfied with our achievements in the traditional brokerage sector in Hong Kong. In the second quarter, the average net asset inflow from new clients exceeded $15,000. The Hong Kong market also recorded the highest average revenue per user, which doubled compared to the fourth quarter of last year. The market was particularly active in the second quarter, allowing us to enhance local partnerships and advertising efforts. Consequently, we onboarded over 7,000 new funded users in the second quarter, which is approximately 2.5 times higher than the previous quarter. In terms of client assets, we experienced a strong net asset inflow during the second quarter. With the Hang Seng Index enjoying several weeks of gains, our assets under custody in the Hong Kong market increased sequentially. In terms of the virtual asset business, our type license was uplifted back in January to proactively treat professional investors. In June, we got additional approval to offer spot crypto trading for retail investors. We launched our promotional campaign for professional investors back in May, and the campaign was very successful. By the end of June, we had already doubled our professional investor users on our platform. So far, we offer the most competitive pricing in Hong Kong in terms of spot crypto trading, providing zero commission and zero platform fees for trading on our platform.

Aaron Li, Head of Investor Relations

Operator, there is one more question that hasn't been answered.

Wu Tianhua, Chairman and CEO

In the second quarter, our wealth management business experienced strong growth, with assets and user numbers rising over 20% quarter-over-quarter and around 50% year-over-year. We also saw an improvement in platform penetration. More than 30% of newly funded clients in the second quarter began using our Tiger Vault product. Additionally, we made upgrades to Tiger Vault during this period. Before the U.S. stock market transitioned to T+1 settlement on May 28, we had implemented conversion functionality across all licenses, allowing support for U.S. dollars, Hong Kong dollars, and Singapore dollars. This enables customers to instantly convert their balances into buying power and engage in faster market trading. The underlying assets of Tiger Vault continued to perform well, with average seven-day annualized yields during the second quarter surpassing 5.2% for U.S. dollar money market funds, 4.2% for Hong Kong dollar money market funds, and 3.6% for Singapore dollar money market funds, offering investors returns above the market average for cash management. Over the past two years of the interest rate hike cycle, our wealth management business has grown significantly in both product categories and assets under management. In the second quarter, we relocated our wealth management business to the home interface of our app to simplify access to a variety of asset management products, including money market funds, stable income products, top-performing funds, ETFs, U.S. T-bonds, and FCS for users with different risk appetites, providing a diversification from pure equity investments.

Aaron Li, Head of Investor Relations

Operator, please continue.

John Zeng, CFO

Okay. I would like to thank everyone for joining our call today. I am now closing the call on behalf of the management team at Tiger. We do appreciate you participating in today's call. If you have any further questions, please reach out to our Investor Relations team. This concludes the call, and thank you very much for your time. Bye-bye.

Operator, Operator

Ladies and gentlemen, that concludes our conference for today. Thank you for your participation. You may now disconnect your lines.