UP Fintech - Earnings Call - Q3 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to the UP Fintech Holding Limited third quarter twenty twenty earnings conference call. At this time, all participants are in a listen only mode. There will be a presentation followed by the question and answer session. I must advise you that this conference is being recorded today, Wednesday, 11/25/2020. I would now like to hand the conference over to your first speaker today, mister Clark Escherji.

Thank you. Please go ahead.

Speaker 1

Thank you, Ravathi. Hello, everyone, and thank you for joining us for the call today. UP Fintech Holding Limited's third quarter twenty twenty earnings release was distributed earlier today and is available on our IR website at ir.itiger.com as well as GlobeNewswire services. On the call today from UP Fintech are mister Wu Tianhua, chairman and chief executive officer, mister John Zheng, chief financial officer, mister Huang Lei, CEO of US Tiger Securities, and mister Kenny Zhao, our financial controller. Mister Wu will give an overview of our business operations and discuss corporate highlights.

Mister Zeng will then discuss our financial results. They will both be available to answer your questions during the q and 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 US 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 six k furnished today, November 25, and our annual report on form 20 f filed on 04/29/2020. 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, mister Wu. Mister Wu will make remarks in Chinese, which will be followed by an English translation. Mister Wu, please go ahead with your remarks.

Hello, everyone, and thank you very much for attending our Q3 twenty twenty earnings conference call. As a result of rapid growth in client numbers as well as our strong commitment to continuous upgrade of our trading platform and services, operational and financial metrics displayed strong improvement. In the third quarter, total revenue was $38,000,000, an increase of 148% from the same period last year and a record high for our firm. Operating income and net income also demonstrated healthy growth. Operating income reached $7,400,000, and net income reached 3.8 and $5,300,000 on GAAP and non GAAP basis.

In the third quarter, we added 46,800 funded accounts, seven times the quarterly growth rate in the same period last year, and total funded accounts reached 214,700, an increase of 110% on the same period last year. I am also happy to report that on 10/28/2020, we reached a major milestone as total client accounts reached 1,000,000. This is especially notable given our five year operating history. Total account balance continued to grow nicely and reached $10,900,000,000 this quarter, a 188% increase over the same period last year. Average client assets also increased 37% from $37,000 same quarter last year to $50,000 this quarter.

As client numbers and assets continue to increase at a healthy pace, I am confident that our firm will continue to produce satisfactory results for our shareholders. In the past half year, our firm reached three major milestones. First and foremost, our internationalization strategy is showing good results. Today, we have licensed subsidiaries in The US, Australia, Singapore, and New Zealand. Every day, we have investors from these countries choose us to open accounts and trade Despite the relative scale of our firm, we are an international company that enables global clients to use one account to trade global equities in The US, Hong Kong, Singapore, Australia, and China through the connect programs as well as other securities such as futures, options, and a wide range of mutual funds that invest in equities, bonds, and currencies.

Overseas clients now account for over 20% of our newly funded accounts, and we are confident this number can increase to more than 50% in the next twelve to twenty four months. Second, we have evolved from a pure discount broker to offering more comprehensive services. Presently, some may harbor the impression that we are still a discount online broker that facilitates retail clients to trade US and Hong Kong equities. Of course, this is where we were when we started our business five years ago. But as of today, our business model has evolved with brokerage as the core, augmented by strong parallel growth in institutional services, investment banking, ESOP, and our international expansion.

In addition to serving our highly engaged clients, we also service institutional investors. In addition to brokerage business, we are also a tech investment bank. Year to date, in 2020, we have served as an underwriter in 12 Chinese ADR IPOs. In q three, we underwrote the IPOs of Lee Auto and XPeng Motors among others. In Hong Kong, we were also an international underwriter for New Oriental Education's Hong Kong listing.

I would like to express my sincere gratitude to the aforementioned firms for placing their trust in Tiger. It is a testament to the strength of our platform and our reputation in the market that after commencing our investment banking business just two years ago, we have already become number one in the world by deal count for underwriting Chinese ADR issuers. Our ESOP management system also continues to demonstrate impressive growth as we lower the barriers and reduce complexity for firms to adopt ESOP systems. In the third quarter, we added 23 new ESOP clients. We expect that these ESOP clients will yield a good number of new high quality brokerage clients.

In the third quarter, ESOP clients accounted for 12.6% of our newly funded accounts. Due to the strong rapport we have built with potential issuers, we expect to maintain our leading position and further expand our market share. Finally, we are gradually moving to self clearing. In July 2019, we acquired Marsco, a licensed US firm with over thirty years experience in self clearing. This was an important milestone for our firm as we can leverage our proprietary technology to fully integrate front end to back end infrastructure, which which strengthens our leading position in r and d and financial operations.

Presently, over 10% of our users are having their US cash equity trades cleared by Marscom as well as all new clients acquired by US licensed subsidiaries. As I close my remarks, I would like to provide an update on our share buyback program. From April 1 to 11/24/2020, we repurchased 695,287 ADS for an approximate consideration of US $2,200,000. I would now like to invite our CFO, John, to go over our financial results.

Speaker 2

Thanks, Tianhua and Clark. Let me break down our financial performance in the third quarter. All numbers are in U. S. Dollar.

Commissions were 19,500,000.0 this quarter, up more than 200% from the same quarter last year on the back of 1.5x increase in trading volume and accelerated user growth. Blended commission rate was 3.1 bps this quarter, increased from 2.5 bps same quarter last year, but decreased from four bps in the second quarter of this year. We didn't offer any discount pricing this quarter. The decrease was primarily due to the increase in trading volume. Interest related income increased 26% year over year to 9,800,000.0.

Other revenue, which includes our IPO underwriting business, increased close to 6x year over year to JPY 8,800,000.0. We were very active in IPO underwriting, under our eight U. S. And Hong Kong IPOs in the third quarter, and we remain very positive on the incoming deal pipeline. Total revenue were 38,000,000, up 148% year over year, a lot of record high revenue in our operating history.

Now switching to the cost. Interest expense was 2,900,000.0, increased 110% year over year, primarily due to higher margin balance. Clearing expense was JPY 3,900,000.0, increased four times, in line with our user growth and increase in trading volume. Compensation increased 37% year over year. We keep adding headcount in key position to support our business growth.

More than 50% of the salary expense comes from research and product team as we keep investing in R and D. Marketing expense was 3,700,000.0, an increase of 147% from last year as we keep spending in user acquisition to take advantage of the favorable market backdrop. As our brand becomes more popular among investors, we see more organic growth. Our funded accounts acquisition cost actually comes down quarter over quarter from last year. Occupancy expense increased 13% year over year to 1,200,000.0 to accompany our headcount growth.

Market data usage expense increased 52% year over year to support our user growth. SG and A increased 68% due to business expansion. Total costs were CNY 27,800,000.0. Operating income was CNY 7,400,000.0. Net income was CNY 3,800,000.0 compared to a net loss of CNY 1,300,000.0 last year.

Non GAAP net income was CNY 5,300,000.0 this quarter, an increase of 7x over same period last year. That concludes our presentation. We are open to Q and A. Thanks.

Speaker 0

Thank you. Ladies and gentlemen, we will now begin the question and answer session. To cancel a request, you may press the pound or hash key. Once again, to ask a question, it's star one on the telephone. Thank

Speaker 3

you.

Speaker 0

We do have our first question from the line of Eric Liu from China Finance. Please go ahead.

Speaker 3

So let me translate my question. So thanks for taking my question. I'm Jackie from China Renaissance. And my question is regarding the ESOP business. I observed that we have very rapid growth of ESOP business this quarter by adding 23 new customers, which accounted for which actually brought 13% of new customers regarding the paying customer.

So just wondering, can management help us elaborate more about our, business trends and our competitive advantage in installed business and what is the growth outlook for this business? Thank you.

Speaker 2

Okay. Let me just quickly translate. So Jacky, thanks for the question. So in terms of ESOP, this is business we are very focused. We think it's a priority for future growth because we think for all the new emerging companies, every company has ESOP plans.

So the TAM, the potential market is super big. So that's why we want to invest a lot of resource into this business. So how we grow very fast in the past couple of years is, first of all, given we have multiple license across different jurisdictions, which give us a lot of strength or I would say leverage to serve those global companies. For example, Xiaomi, they have employees in twenty, thirty different countries and each country has different jurisdictions tax code. To be able to serve those people in different jurisdictions is actually a pretty complicated business Because we have licenses in multiple locations, we will be offering customized service to service the company's needs under different jurisdictions.

That's why you can see in the past year, we pretty much dominate the ADR ESOP business. More than 50% of the ADR insurers choose us choose us as their ESOP provider. So I think going forward, given we are working on more cases, especially those company cases, give us a lot more experience to be able to service more future issuers. In the future, we think from existing future clients, we'll be able to add in more ease of corporate clients. And in return, it will help us to acquire more high quality future users.

Thanks.

Speaker 3

Thank you so much.

Speaker 0

Thank you. Once again, ladies and gentlemen, to ask a question, please press star one on your telephone. We have our next question coming from the line of Han Young Wong from Eighty Six Research. Please go ahead.

Speaker 3

So let me check with my questions. I have two questions. The first one is regarding on the commission rate. So in my calculation, the commission rate and the margin interest rate in q three were down compared with q two. So any color on that would be helpful.

My second question is about licenses. So do we have any plan to apply for the brokerage license in Hong Kong recently? And follow-up question on the institutional clients. So how many institutional clients that we are serving now? What what are the average assets that we managed for the institutional investors?

Thank you.

Speaker 2

So I will answer your first question on the take rate and the interest rate. Then I will let Tianfa to answer your second and third question. Okay. So on the take rate, like I mentioned earlier, so the thing is right now because the trading volume has gone up, so the blended commission rate came down. In the third quarter, our pricing is actually the same versus as in the second quarter.

So the decrease of the blended interest blended commission was due to the increase in trading volume. And the margin interest rate, actually, the in the third quarter, there were quite a few big Hong Kong IPOs, okay? But again, our current business model, we rely on our clearing partner in Hong Kong to provide the funding. That's why our margin margin income, which is the margin the net interest margin was relatively low. This is something we're working on to address in the future.

Okay. Let me let me check quickly. Okay. Go ahead.

Speaker 3

So let me try to my question. So if we compare with the inactive broker, we still serve, like, a small group of the institutional investors. So could you help us understand how big the market will be to serve the institutional investors? Thank you.

Speaker 2

So, Haiyang, you you want to know how big is the addressable market of the our potential institutional investor targets. Right? Overall, how big is the size? Let me just elaborate a little bit more. So in terms of how big is the market, we think it's very hard to pin down our exact number because there are a lot of new, I would say, institutional investor coming to the market and some of them has grown from small to much bigger size.

So what we think is there is different huge needs banks like us or for like specialized broker like us to service those nice smaller institutional investors. So what we can service them, just to recap what Tianhua said earlier is we offer a differentiated service. For example, they can open an account with bigger bank to have a prime brokerage account, but we can help them to set up the account with live traders to help them doing all the trades. And also help them to grow, sometimes will help to do even fundraising as well. Those are the stuff we can offer to more institutional investors.

And to your second question on the license, definitely Hong Kong is definitely a huge market for us. As you can see on our financial performance, same as the same first question you asked. It's like, we left too much money on the table because we don't have the Hong Kong licensee yet. So definitely, we will let the market know once we have progress in this space. Thank you.

Speaker 3

Very helpful. Thank you.

Speaker 0

Thank you. We have our next question coming from the line of Liu Fang from CICC. Please go ahead. Okay. So let me translate my questions.

Well, the first question is about the investment banking business. So we noticed that in this quarter, we have made great achievements in assisting Chinese companies to live in The US market. So what kind of special efforts have we made in the investment banking side and compare to other competitors what are our unique advantages? And the second question is about the international layout. So how do we acquire customers in countries like Singapore, Australia, and New Zealand?

And is there any difference in customer acquisition cost between these arrows and Mainland China?

Speaker 2

Okay. Let me quickly translate the investment banking question first. So we pioneered The U. S. IPO distribution service back in 2017 on the back of our strong demand from retail and institutional investors.

As you can see, our investment banking business has been growing very rapidly. Since then, in within two years of time frame, we have been working on more than 60 U. S. And Hong Kong IPOs. And then this year, we have been working on pretty much all the big name popular ADR IPOs.

So how we can crack into the market when there are a lot of competition from traditional international and domestic investment banks? Because our principal philosophy is we have to we want to bring in value added service to the issuer. So for example, we provide very steady demands. Those demands, especially during the tough market like last year 2019, has been very helpful to the issuer to be able to get the IPO done. And also we provide very customized DSP at IRPR services to the issuers, which traditional banks, they don't really be active in that kind of space.

So this gives us an opportunity to be able to service those new economy issuers. Plus, we have been doing the IPO ourselves a couple of years ago. So we know all the stuffs, issue potential issuers they have to manage when they are doing the IPO. So that's why we have a huge growth in this space and as an investment basis also help us to drive more institutional and the retail brokerage business. So given we are a tech backed brokerage company, so this gives us the flexibility to enter into new markets and be really adaptive to service the local leads.

For example, we saw the leads in Singapore and Australia at similar opportunities to what we saw in China a few years ago when we started that business. So we think there is a huge potential down there. And the beauty of international expansion is the funding account conversion rate will be much higher. And also we can offer very differentiated service versus the local brokers. For example, commission rates will be much lower than the existing local players.

And we help the local people not only trade their local stocks and also we help them to trade the Hong Kong and The US equities. So we are very bullish about our international expansion strategy. We just started international expansion pretty much in the beginning of this year, and we are seeing very promising results. So we are very confident in the next twelve to twelve to twenty four months, our international funded accounts will account for more than 50% of our real paying clients. Thanks.

Speaker 0

Thank you. Once again, ladies and gentlemen, to ask a question, please press star one on your telephone. We do not have any more questions now. I would like to hand the conference back to our speakers today. Please go ahead.

Speaker 1

Hello. This is Clark. 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.

Speaker 2

Thank you, and have a great

Speaker 3

day. Thank you.

Speaker 0

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