UP Fintech Holding Limited
Q2 2020 Earnings Call Transcript

Published: 18 Aug 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the UP Fintech Holding Limited's Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. I must advise you that this conference is being recorded today, Tuesday, August 18, 2020. I would now like to hand the conference over to your first speaker today, Mr. Clark Soucy. Thank you, please go ahead.

[Clark Soucy:]

Thank you, Raves. Hello everyone, and thank you for joining us for the call today. UP Fintech Holding Limited's second quarter 2020 earnings release was distributed earlier today and is available on our IR website at ir.itiger.com, as well as Globe Newswire 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 U.S. Tiger Securities; and Mr. Kenny Chao, 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 contains 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 statements. 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 18, and our annual report on Form 20-F filed on April 29, 2020. We undertake – excuse me, 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 an English translation. Mr. Wu, please go ahead with your remarks.

[Wu Tianhua:]

Good day, everyone and thank you very much for attending the Tiger Brokers 2020 second quarter earnings conference call. We saw moderated market volatility in the second quarter, but our users remained very active which fueled our strong growth this quarter. Total revenue exceeded US$30 million, a 122% increase on the same period last year. This marks the second quarter this year when revenue growth exceeded 100% on a year-on-year basis. Our operating efficiency and earnings quality keep improving. We achieved consecutive quarters with GAAP profits. In the second quarter of this year, our company reported operating income and non-GAAP operating income of US$5.1 million and US$6.8 million respectively. Please refer to our Form 6-K furnished today, August 18, for a reconciliation of non-GAAP financial measures to GAAP financial measures. Our improving financials are dependent on the trust and goodwill of our users. As Tiger continues to grow our business and our brand, as well as provide more differentiated services, more people entrusted us with their money. In the second quarter, we added 33,800 new accounts with deposits, a new quarterly high for our company and total accounts with deposits increased 76.7% from the same quarter last year. We saw strong inflows this quarter. Total client assets reached a new high of US$8.3 billion, 133% higher than the same period last year and a 51% increase on the previous quarter. I expect that with high growth in client numbers and client assets, Tiger will keep delivering good financial performance in the near future. While brokerage is of course our core business, investment banking, ESOP and our internationalization efforts continue to develop nicely. Our U.S. and Singapore businesses are on the right track. They are expanding our customer acquisition channels, while diversifying our revenue streams. In addition, we completed our self-clearing infrastructure set up and gradually started to self-clear U.S. equities. Thanks to our growing influence in capital markets, as well as our strong retail and institutional client base. Our investment banking business continues to grow rapidly. In the second quarter, Tiger participated in eight U.S. IPOs. Recently, we also served as an underwriter for Li Auto, solidifying our number one position as the most active ADR underwriter in terms of deal count. We were also active in high profile Hong Kong IPOs. In the second quarter, we were a joint bookrunner for NetEase's Hong Kong listing, which demonstrates Tiger is an indispensable partner for Chinese companies looking to enter global capital markets. In the past half year, our ESOP business has grown rapidly. We have invested heavily in this system to gradually improve its functionalities. This system now supports complex plans that span multiple countries and corporate entities. In the second quarter, I am proud to report that we added 16 ESOP customers. In the first half of this year, over 50% of Chinese ADR issuers have chosen Tiger’s ESOP system. We look forward to continuing to grow our dominant market share and are resolute in our conviction that our outstanding service and comprehensive capabilities will attract more clients to our ESOP system. With regards to our wealth management business, at the end of the second quarter, we unveiled our proprietary fund analysis system that assists clients analyze the rich range of investments available on our Fund Mall, which presently features over 100 mutual funds from distinguished global asset managers. Finally, I would like to provide an update on our share repurchase program. From April 1st to August 17th, we, in total, repurchased 700,000 ADS for an approximate consideration of US$2.2 million. I would now like to invite our CFO, John to go over our financial results.

[John Zeng:]

Thanks Tianhua, and Clark. So, as mentioned earlier, second quarter was a strong quarter in terms of both operating and financials with favorable market backdrop, increased user base, and trading activities, commission revenue went up 178% year-over-year to US$18.8 million this quarter. Interest-related income, which combines financing service fees and the interest income went up 65% year-over-year to US$8.8 million, thanks to increased margin trading and securities lending activities. Other revenue also increased 54% year-over-year to US$2.5 million, primarily due to more IPO underwriting. Total revenue were US$30.1 million, up 122% from same quarter last year. Taking out the interest expense of US$1.9 million, total net revenue were US$28.2 million, an increase of 125% from same quarter last year. Now switching to cost. So execution and clearing cost were US$2.9 million, increased almost 4 times year-over-year as we have a much bigger user base and increased trading volume. Compensation expense increased 39% year-over-year to US$11.3 million. Taking out share-based compensation, the cash portion of compensation expense increased 36% year-over-year. The increase was due to we keep adding accounts into key positions to support the rapid growth of our business. Marketing expense increased 48% year-over-year to $2.9 million this quarter as market backdrop remains favorable for user acquisition. We likely will keep investing in marketing in the second half. Occupation - occupancy, depreciation, and amortization increased 42% to US$1.1 million. SG&A increased 43% to US$2.8 million, both increases are in line with our business expansion. Total operating cost were US$23.1 million, an increase of 52% year-over-year. Operating income, which is a key metric we focus on internally increased to US$5.1 million this quarter, a significant improvement from loss of US$2.6 million in the same quarter last year and US$1.9 million in the first quarter of this year. Net income attributable to UP Fintech was US$1.1 million, as compared to a net loss of US$1.9 million in the same quarter of last year. One thing I want to elaborate is our effective tax rate of 49% this quarter looks very high. The reason is while we started to make profit on a consolidated group basis, some of our subsidiaries still don’t have profit. So deferred tax assets of US$2 million of those entities cannot apply. We expect our effective tax rate to gradually go down as most subsidiaries will make profit and can apply deferred tax asset benefits. That’s it for the management presentation. We are now open for questions.

[Operator:]

[Operator Instructions] Thank you. And your first question comes from the line of Daphne Poon from Citi. Your line is now open.

[Daphne Poon:]

Hi, management. Thanks for taking my questions. So, my first question is how are your commission rates? So, do you see a meaningful increase in terms of your net commission rates in the second quarter to 3.4 basis points or just can you explain the reasons behind? And what’s the outlook going forward? And also, in terms of your new customer growth, we have seen some very strong momentum year-to-date. Just wondering if it’s possible to get some color on your full year – your customer growth outlook or maybe the runrate in the third quarter or so far? And also lastly, I want to check on your overseas market expansion. So, we understand you are heading into – for example the U.S. market and also there is a couple markets since the beginning of the year. So, just wondering if you can share any progress there for, example the number of new clients and also the – maybe the client access contribution? Thank you.

[John Zeng:]

Sorry. Okay. Daphne, let me answer your first two questions regarding the commission rate and also the new customer growth. Then I will let Tianhua to answer your question regarding the offshore international expansion, okay? So, our commission in the second quarter, actually our commission, it has been gradually increasing, maybe for the first two quarters of this year. I think the main reason is that first of all there are more people trading, second thing is there are some people are trading more diversified products. So instead of trading U.S. equities, we have watched all our people trading U.S. options which relatively is a higher, I would say, higher margin product launch, so that’s why you can see the blended commission rate also goes up, okay. So that’s the reason for – that’s the answer for the first question. Then for the second question is, unfortunately, I cannot give you a very clear guidance in terms of the total customer growth this year. The main thing is because, our international expansion just started. So, U.S. started in fourth quarter last year and Singapore started this year. So, for those two regions, so far the growth has been pretty positive. But right now I still don’t have the full grasp. Is there a growth potential, so I cannot give you very clear guidance, but I can share with you the momentum is pretty strong. So, I will let Tianhua to answer your third question.

[Wu Tianhua:]

Well, in terms of international expansion, so, so far we see very promising growth out of U.S. and in the Singapore. So, if you average them up, the international new users are probably this year accounted for more than 10% of our quarterly user growth. But in June, the new user growth in the offshore regions actually grow much faster than the April composition. So, overall, we are very positive on the international expansion. I think we have a good brand and also user experience and offering in those regions. So we are very positive on the growth prospects.

[John Zeng:]

Daphne, do you have other questions?

[Daphne Poon:]

Yes. Actually, if I may, can you actually share the breakdown of your trading volume by different heads of products? For example, what is the percentage of trading, accounting for your trading volume in Q2?

[John Zeng:]

Sure. So, the cash equity accounts for over 50% of our trading volume. Unless, if you are looking like futures options it’s like 45%, that’s the total composition of our trading volume.

[Daphne Poon:]

Okay. Understood. Thank you.

[John Zeng:]

Thanks.

[Operator:]

Thank you so much. [Operator Instructions] And your next question comes from the line of Yan Li from CICC. Your line is now open.

[Yan Li:]

Hello management. So, firstly congrats to an impressive financial performance for this quarter and thanks for giving the chance to ask these questions. So, operational financial performance, I think I got three questions for you today. So, first of all, as for the number of accounts with deposits increased by approximately 33,800 this quarter and I was wondering if you can share with us more information on the geographical distribution of this number. So, what are the specific percentages of this number that are from Mainland China, Hong Kong and other regions respectively? And secondly, I saw you gradually started to use Marsco Investment Corporation to do the self-clearing. So, I was wondering what is the percentage of transactions are using the self-clearing for right now and what the percentage will be in the future and for the rest of the year? And then last, I have one follow-up question for the previous question of other internalization – about your international business. So, earlier, I saw on the news that you got to sign more U.S. licenses. So, could you please share more information on how you will plan to use these licenses to expand your businesses in the United States? And how you will deal or position your U.S. retail sector to the development of your whole company? That’s all. Thanks.

[John Zeng:]

Okay. So I will let Tianhua answer your first question.

[Wu Tianhua:]

So, in terms of our new user with deposits in this quarter, so far still the majority comes from the PRC region, okay. But like we mentioned all years, so our international business even though it just started couple quarters ago, but right now, we are seeing positive growth. So, going forward, we expect more users will come outside of China.

[John Zeng:]

Okay. To answer your second question regarding Marsco. So, as you know, we acquired Marsco back in last July. It took us a year to set up the infrastructure, get the systems fully integrated and also we did a bunch of testing. So, in the second quarter, we finished all the testing and we just did very minimum self-clearing trades to make sure everything is in place and we don’t jeopardize any user experience. Starting in the third quarter and fourth quarter, I think we will gradually put in more trading volume into Marsco. The exact volume percentage, it’s hard to say right now. But my goal is to have about a 15%, 20% by the third quarter. And eventually we have another 30%, 40% by the fourth quarter. That’s our goal. It depends how the market goes and how the trading system works from – for our day-to-day operation. So, to answer your third question, regards to the license. Yes, so, we have a really strong team in the U.S. They are based in New York and all the guys are used to work for the both bracket firms in the states. So, we got a research license, opportunity license, FA license recently. So what we are going to do is, it’s a lot of way for us to expand our institutional business. Because, right now we called a lot of the U.S. institutions which definitely helps us in terms of getting IPO mandates and also with the research license, we will be able to issue research on those IPO deals we underwrote. So, actually we already start to issue research on Bloomberg. So, if you guys can check – you guys can see the type of these in terms how we covered Chinese ADR business and also the Hong Kong listing companies. So, I think overall, getting more license in the U.S. will definitely help us to increase our brand and also help us acquire more users both institutional and retail investors.

[Operator:]

Thank you so much. [Operator Instructions] There were no further questions at this time. Speakers, you may continue.

[Clark Soucy:]

I would like to thank everyone for joining our call today. I am now closing the call on behalf of the management team here at UP Fintech. We do appreciate your participation 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.