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Below is an excerpt from a complimentary research note by our China analyst Felix Wang. To read more of our China research, check out our latest China Pro product. |
TIGR printed a surprise loss this morning and missed Q2 revenue estimates by 16%, although they are few Bloomberg estimates out there.
Gross margins continued to decline and marketing costs soared, as TIGR fights an intense marketing battle in Singapore - confirming two of my Short thesis points.
Marketing costs per paying user soared 81% YoY, breaking a string of cost efficient quarters. Management said marketing costs for Q3 will be in-line or slightly lower QoQ. # of registered clients missed my estimate while # of paying clients beat, although there were mostly low quality, young Singapore investors as assets per paying client account fell 21% QoQ (management said 10-15% decline for July/August).
Commission rate slumped to 3.0bps which was the lowest since Q3 2019, affected by a weak market and lower cash equity mix.
Shorting TIGR has been a big winner for us on an absolute and relative basis.
Since I initiated the position in May, TIGR is down 31% and underperformed FUTU by 41% and major China Internet indexes by ~10%. A major reason for my pair trade (Long FUTU, Short TIGR) was the major mismatch in valuation and growth expectations between the two players.
TIGR's 2022 P/E valuation premium vs FUTU shrank from an all-time high of 25x a few months ago to 3.5x before today's print. Going forward, TIGR P/E is probably less relevant as there would be barely any profits, as they continue to market aggressively in Singapore.
This chart below from my August presentation confirms how the Street was too optimistic on TIGR's Q2 revenue growth and too pessimistic on FUTU's Q2 revenue growth.
Q2 ended up exactly at our model estimate of 29% revenue growth premium for FUTU (129% growth for FUTU vs 100% growth for TIGR).
Although TIGR captured more Mainland China clients in Q2, it was at a slower clip than FUTU - confirming another Short thesis point. That margin of difference widened to a record 76bps.
In my opinion, FUTU has the superior trading platform and its growth expectations should continue to exceed that of TIGR's. In addition, my math showed that the Singapore TAM opportunity was overhyped by TIGR management.
Furthermore, the upcoming change in HK IPO settlement period (T+2) hurts TIGR more than FUTU given its greater reliance on IPO financing (as % of revenues). Owning to regulation changes, if clients have to choose only one brokerage platform for HK IPO subscriptions, FUTU has comparative advantages over TIGR. Thus, TIGR has more hurdles ahead than FUTU.
So why am I covering? Much of the damage is already reflected in TIGR shares and with a glass half full approach, TIGR gained market share in HK trading volumes in Q2. Although TIGR may have trouble printing profits given high marketing costs, investors may be more excited by the user growth.
Moreover, given some rebound in sentiment from Chinese traders, I expect trading volumes in HK and US to rebound. If that happens, both TIGR and FUTU should go higher. In addition, the capital markets rhetoric from the CSRC regulators have been mixed lately, which I see as a positive sign. While the big IPOs are at a standstill given regulatory changes, smaller ones are being listed in HK.
There are still 200 active IPO applications on HKSE. While this was a pair trade with FUTU, I'm going to hold onto to FUTU even though Q3 expectations aren't low.