Earnings Call: Q2 2021

Sep 10, 2021

Earnings release

Ladies and gentlemen, thank you for standing by, and welcome to the UPFintech Holding Limited Second Quarter 2021 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, Friday, September 10, 2021. I would now like to hand the conference over to your first speaker today, Mr. Clark S. Suzy. Thank you. Please go ahead, sir. Thank you, operator. Hello, everyone, and thank you for joining us for the call today. UPFintech Holding Limited Second Quarter 2021 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 Uptintech are Mr. Wu Tianhua, Chairman and Chief Executive Officer Mr. John Zheng, Chief Financial Officer Mr. Huang Lei, the CEO of U. S. Tiger Securities and Mr. Kenny Zhao, our Financial Controller. Mr. Wu will give an overview of our business operations and discuss corporate highlights. Mr. Zhang 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 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 ks furnished today, September 10, 2021, and our Annual Report on Form 20F filed on April 28, 2021. 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. Hello, everyone, and welcome to Tiger Brokers 2021 2nd Quarter Earnings Conference Call. Although market sentiment was weaker in the 2nd quarter, We still achieved substantial growth, thanks to internationalization and the strength of our comprehensive product and service offerings. Total revenue in the Q2 was $60,200,000 representing 98.7% growth year over year. This quarter, we also increased investment in user acquisition, self clearing and talent recruitment. We are confident such investments will bolster our market leading position and fuel future expansion in our business. Factor in the $13,700,000 fair value change to convertible bonds we issued earlier this year and non GAAP loss is $4,400,000 for this quarter. Total customer accounts increased by 249,000 in the Q2 to $1,649,000 which is 2x the total number of accounts in the same period of last year. We added 153,000 funded accounts this quarter, 4.5 times that of the quarterly addition last year and a 30.4% increase quarter over quarter. A number of total funded accounts rose to 529,000. Of the 153,000 new additions this quarter, over 60% came from offshore, exhibiting the growing momentum of our internationalization strategy. Total newly funded accounts in the first half of twenty twenty one reached 270,000, surpassing the total number of funded accounts acquired Since our platform went online in 2015 through 2020, even with a weaker market backdrop, we still see healthy asset inflows. Total AUM reached $23,900,000,000 this quarter, up nearly 3 times year over year and 11.8 percent quarter over quarter. I would now like to take this opportunity to provide investors an update on 3 key business initiatives at our company. Tiger Brokers is continually expanding our global reach and our network of subsidiaries covers the U. S, Australia, Singapore and other countries. Our subsidiaries were licensed to conduct a wide range of securities businesses, including Investment Banking, Asset Management and Brokerage. Our internationalization continues to accelerate. More than 60% of newly funded accounts this quarter came from offshore markets. And as of June 30, 40% of our total funded accounts were from international users. We only started executing on our internationalization strategy just over a year ago. But our progress thus far is a testament to the value proposition of our We see vast latent demand for our services across a wide range of countries and regions and expect that internationalization will not only spur growth in new accounts, but also raise the ceiling for the future size of our client base. As we expand to new countries and add products and markets to our trading platform, our firm gains new experience and knowledge for engaging with regulatory bodies, enabling us to further enhance the client experience. I am pleased to report that as of today, we already have over 200,000 Funded accounts in Singapore, we firmly believe internationalization will drive further growth. Although the market has been weak since the Q2, We are confident to achieve our guidance of 350,000 new funded accounts this year. 2b Services. Today, our growth strategy envisions simultaneously developing our expertise in investment banking, The rapid expansion of our ESOP business continues to exceed our expectations. In the Q2, we added 51 new ESOP clients for a grand total of 2 16 clients. We serve not only U. S. And Hong Kong listed companies, but we also help A share companies manage their employee options. In the second quarter, we participated in 17 IPOs and follow on offerings in the U. S. Market and also serve as an underwriter for 14, including BOSS, Ai Wei Show, International and Ding Dong among others. In light of the recent concerns over ADR IPOs, I would like to highlight for our investors and stakeholders that we possess extensive capabilities to act as an underwriter in Hong Kong. In the past year, we participated in many popular listings in Hong Kong, such as those of NetEase, XPeng, Bilibili, Harbor Biomed and Anxing Jing among others. Finally, I would like to provide an update on our self clearing In July of 2019, we acquired TradeUp Securities Inc, formerly MarshCo, a broker dealer with over 30 years experience self clearing and its own self clearing license because we wanted to establish the technical, operational and compliance capability to manage our own proprietary brokerage system. I am pleased to report that as of the Q2 of 2021, More than 50% of our clients were having their U. S. Cash equities self cleared by trade up. We project that by the end of this year, we will be self clearing Hello, thanks for taking my name and Clark. Let me walk through our Q2 financial performance. All numbers are in USD. Total revenue was 60.2 this quarter, up 99% year over year. Commissioning were $31,000,000 up 64% year over year, but down 41% from the Q1 of this year. The drop in commission was due to weaker market sentiment in the second quarter as Trading volume dropped 18% quarter over quarter, plus the proportion of higher unit economic products, for example, cash equity, dropped from 50% of the trading volume in the Q1 to 40% of trading volume in the Q2. The decrease in commission also resulted in a 1st quarters. Interest related income, which combines financing service fee and interest income, was RMB 19,000,000, an increase of 115% year over year and 7% quarter over quarter. The increase was due to higher margin and securities lending balance and gradual ramp up in self clearing. Other revenue was $10,200,000 up 300% year over year, primarily due to more equity underwriting, IRPR services and Currency Exchange Services. Now switching to cost. Interest expense increased 100 54% year over year to $4,800,000 this quarter, in line with our usual growth as increasing margin activities. Execution and clearing expense were $6,600,000 this quarter, increased 131% year over year as we have more funded account customers and higher trading volume. Employee compensation increased 80 2% year over year to 20,600,000 as we keep adding headcounts in R and D self clearing to support our global growth. Along with the headcount increase, this quarter occupancy expense increased 32% year over year to RMB1.5 million. SG and A increased 84% year over year to 5,100,000 Marketing excellence had the most uptick within OpEx, increased more than 700% year over year to 24,000,000. We are fully committed to internationalization. And in the second quarter, we increased marketing offshore, mostly in Singapore through both online and offline channel to drive brand awareness and user acquisition. We strongly believe grabbing more market share right now will help develop deliver better financial performance down the road. As a result of rapid user growth, communication and data usage also increased 143% year over year to 5,000,000 this quarter. With the increased spending to drive growth and a fair value change of RMB 13,700,000 on the convertible bonds we issued earlier this year, Our land loss for the 2nd quarter was $21,500,000 Taking out the fair value change and other non GAAP items, Our non GAAP loss for this quarter was $4,400,000 Now we have concluded our presentation. Operator, please open the line for Q and A. Thanks. Certainly. Ladies and gentlemen, we will now begin the question and answer Please hold on till we compile the Q and A roster. We have the first question, this is coming from the line of Han Ku from CICC. Please go ahead. This is Han from CICC. I have two questions. The first one is about the guidance of the Q3. We see the strong growth of users in Q2. Could you give us more color on the number of clients and The second question is about the premium fee rate. We are wondering why the execution and the premium fee rate to our commission revenue went up in Q2, while we see the continuous increase in the first Thank you, Brian. So I will answer your two questions. First is on the guidance for the Q3. So looking at July all this data, We see higher new e products like cash equity option, volume went up versus the 2nd quarter. So we feel if market stays like this and we will expect commission to have a moderate increase in the Q3. But ADR underwriting is on hold due to the current policy from China and the U. S. Regulators. So short term, this could have a But the impact should be manageable as ADR underwriting only accounted for less than 10% of our revenue. So we think the ADR equity offering will resume once And in the meantime, as Tianhua mentioned earlier, we are very active in Hong Kong IPO as international underwriter, And we already underwrote Bilibili, Shop on those 9 popular IPOs. So this could offset some short term impact from the HODL in U. S. Equity underwriting. In terms of customer acquisition, so the biggest OpEx is sales and marketing. We expect the 3rd quarter market to our expense to be in line or less than the second quarter as we don't offer any offline events in Singapore. In terms of AUM per users, so in July August, we still see very healthy value inflows for both months. But due to market sentiments, average AUM is down around 10% to 15% by end of August versus by end of June. And your first second question regarding the The clearing expense went up. So the main reason of the increase in clearing expense Yes, we have a lot more Singapore clients and we offer Singapore stock trading. Based on local regulation, if the client is trading Singapore stock, The client's asset needs to be hold at SGX clearing member. Our Singapore subsidiary is not a SGX member yet. So we paid 3rd party custodian fee for each client to open a company with us. Given we have over 200,000 SG Singapore clients already, we paid close to $2,000,000 custodian fee in the 2nd quarter, which counted as our clearing expense. As you might know, our Singapore subsidiaries already received AIP from SGX to become a clearing member. So once we officially become the SGX clearing member, we can greatly reduce the custodian fee. I believe we can see some reduction in custodian fees starting in the Q1. Thanks. Thanks. That's very helpful. Thank you. Please note there might be a slight pause as we collate the questions. We have the next question, which is coming from the line of Julie Zhang from Citi. Please go ahead. So on the client funded clients' profile, so we use the users we acquired Last year, say, Q2 of 2020 as a cohort sample, initial deposit among that group is around US6000 dollars to US7000 dollars 1 year later, by end of Q2 this year, average client asset is around USD 30,000. Since Q2 of last year, each quarter, this cohort group has net asset inflow, which means they are keeping deposit money into Okay. If we look at new customer we acquired this quarter's Q2 of 2021, Their average initial deposit is around USD5,000, slightly below the initial deposit of the Q2 of 2020 clients. We don't think this is due to a deterioration of client quality. We feel it's more like it's more due to the less attractive market backdrops. We feel similar to the clients we acquired last year after several quarters, they will keep depositing money to trade on tighter platform. So on customer acquisition costs and payback, we still use the Q2 2020 as a cohort sample. Back then customer acquisition costs was about USD130. In fact, the market was more active. So if we only count the net commission, excluding interest, the payback was around 2 quarter for that cohort group. Look, I nearly acquired a user in the Q2 of this year. Due to more competition, the customer acquisition costs went up to around US160 dollars per person. And net commission also dropped due to a weaker market drop. Still, we feel it's very still going to be attractive for us to acquire those users even though the payback increased to 4th to 6th quarter Because our users are relatively young, as long as we can get them paid back in a relatively short period, there will still a lot of upside for us to monetize. Thank you, Chidi. We have the next question. This is coming from the line of Eric Liu from China Renaissance. Please go ahead. So, thanks management for giving me the opportunity to ask questions. So my first question is, you saw the trading volume decrease quarter over quarter in Q2, but the net interest income and margin financing balance both increased, especially the margin expansion barrier. So can I ask the rationale behind this? So for the second question, So we noted, our number of new paying clients acquired from Mainland China was more than our competitor. So can I ask what's the current what's our current customer acquisition strategy in Mainland China and the cost of it? Thanks. Sure. Thanks, Eric. So I will answer your 2 questions. So the first one was on the net interest So the main reason of the net interest income increase while the trading volume came down is we're starting To gain proper self clearing capability. So once we're starting given we have more and more And also gives us more flexibility in terms of the cap we can lend to each customers. And also becoming a self caring firm enables us to become a direct counterparty for securities lending business, which is pretty lucrative on the street. So we can generate more interest, we start sharing with other intermediaries. So that's the main reason, our interest Net interest income increased in the 2nd quarter while the trading volume came down. And of course, the margin balance, if you look at our balance sheet, So increase versus the Q1, but the RMB1 billion margin balance on our balance sheet includes Hong Kong IPO. So take out Hong Kong IPO, which is not that profitable for us for the Hong Kong IPO Margin business, taking out that part, our margin loan balance is about RMB450 1,000,000, while in the Q1 it was about RMB400 1,000,000. Those 2 are the main reasons why net interest income went up in the Q2. And in terms of the customer acquisition For onshore customers. So in the Q2, we have been actually working with more Channels or intermediaries to target Chinese investors who already have SA Offshore. So this is showing so far showing good results. And of course, our ESOP is also a pretty good user acquisition too fast Tap into those Chinese users. In terms of customer acquisition cost, it's pretty much in line with Our previous customer acquisition cost for Chinese users, the major increase of our customer acquisition cost actually came from Singapore, as we mentioned Thank you. We have the next question. This is coming from the line of Yaa Zheng from T. H. Capital. Please go ahead. Hi, management. Thank you for taking my question. This is Bella from C. H. Petrol. I have one question. I hope management could shed some light on the trading asset distribution, given the previous Experience and regulations on Chinese ADR in terms of your customer transaction behavior, do you see any shift to Hong Kong Securities. And can we think this intensive competition was partly Due to phone candles transaction having changed, that's my question there. Sure. You were a little bit breaking up. So you mean the Trading volume shifting to Hong Kong and we see a more strong competition from the existing players? Yes, exactly. Okay. So in terms of so the thing is right now, If you look at all the Chinese ADRs coming back to Hong Kong, we think this will likely be a trend. As we mentioned earlier, We have been very active in Hong Kong as an international underwriter for Chinese ADR secondary listing in Hong Kong. So we think at We feel pretty confident we can keep getting more corporate clients and also use these opportunities to acquire more retail clients. And then in terms of trading capabilities, traditionally, our strength was in the U. S. Market, but recently we have developed a lot of more resources to develop our Hong Kong For example, the Hong Kong Level 2 data, I think we are one of the few firms to offer it for free. And the Hong Kong options, We are one of the first firms to offer to Hong Kong to investors. So we think the trading, no matter it's from the primary market or the secondary market, We are much more capable versus we were 1 or 2 years ago. So I think the trend will still Once we develop more resources into the Hong Kong trading capability and R and D. Thank you. We have no further questions at this moment. I would like to hand the conference back to our host for any ending remarks. I'd like to thank everyone for joining our call today. I am now closing the call on behalf of the management team here at Tiger. We do appreciate your