UP Fintech Holding Ltd annual report, Q4 FY2023

UP Fintech Holding Limited: FY2023 Form 20-F Summary

Business context and reporting period

UP Fintech Holding Limited, branded as Tiger Brokers, is a Cayman Islands holding company operating a global digital brokerage and financial technology platform. Its businesses include online brokerage, margin financing and securities lending, IPO distribution, employee stock ownership plan management, asset management and wealth management. Operations are conducted primarily through subsidiaries in New Zealand, Singapore, the United States, Hong Kong and Australia, together with China-based variable interest entities (VIEs).

The filing covers the fiscal year ended December 31, 2023, with comparative U.S. GAAP information for 2022 and 2021. The filing was signed on April 22, 2024. Although the requested period is 2023 Q4, the filing is an annual report; selected fourth-quarter operating metrics are provided, but a complete standalone Q4 income statement is not presented in the filing text.

Financial performance and key metrics

Metric	2023	2022	Change
Total revenue	US$272.5 million	US$225.4 million	+20.9%
Net revenue after interest expense	US$225.5 million	US$206.7 million	+9.1%
Net income	US$33.0 million	Net loss of US$2.3 million	Returned to profitability
Net income attributable to UP Fintech shareholders	US$32.6 million	Net loss of US$2.2 million	Returned to profitability
Adjusted net income	US$43.2 million	US$12.6 million	+242.4%
Income before taxes	US$46.0 million	US$2.0 million	+2,163.7%
Net income margin	12.1%	-1.0%	Improved materially
Operating costs and expenses	US$192.7 million	US$205.0 million	-6.0%
Net cash from operating activities	Use of US$6.6 million	Source of US$258.1 million	Material deterioration

Interest income was the principal growth driver, rising 75.3% to US$149.3 million and representing 54.8% of total revenue. Financing service fees increased 54.1% to US$12.2 million. Commissions declined 14.4% to US$92.6 million as annual trading volume fell from US$323.2 billion to US$294.2 billion. Other revenue declined 23.8% to US$18.4 million, primarily because of lower IPO distribution income.

Interest expense increased 151.5% to US$47.0 million as funding costs rose. Operating leverage improved as execution and clearing expense declined 41.8% to US$9.1 million, and marketing and branding expense declined 37.0% to US$20.9 million. Employee compensation and benefits were broadly stable at US$100.8 million, while communication and market data expense increased 13.6% to US$30.8 million.

Adjusted net income excludes share-based compensation, impairment loss from equity investments and fair-value changes from convertible bonds. Share-based compensation expense was US$10.1 million in 2023.

Liquidity, balance sheet and debt

Cash and cash equivalents were US$322.6 million at December 31, 2023, compared with US$277.7 million at year-end 2022.
Cash segregated for regulatory purposes was US$1.617 billion, down from US$1.678 billion.
Total assets were US$3.746 billion and total liabilities were US$3.251 billion.
Customer payables were US$2.913 billion, reflecting customer cash and collateral balances rather than conventional corporate debt.
Convertible bonds had a carrying amount of US$156.9 million at year-end 2023. The instruments have a 1% annual interest rate and mature in 2026 unless previously converted.
Total shareholders’ equity was US$488.7 million, compared with US$447.0 million at year-end 2022.
The company reported no significant capital or other commitments, long-term obligations or guarantees as of December 31, 2023.
Management stated that existing cash and expected operating cash flows should fund working-capital and material cash requirements for at least the next 12 months.
Regulated broker-dealer subsidiaries met applicable minimum capital requirements. Aggregate reported excess net capital was US$287.6 million at December 31, 2023.

Cash flow was affected by a US$249.2 million increase in financial instruments held at fair value and a US$109.0 million increase in receivables from customers, partly offset by a US$415.1 million decrease in receivables from brokers, dealers and clearing organizations. Capital expenditures were US$2.8 million in 2023.

Fourth-quarter and operating indicators

Fourth-quarter trading volume was US$81.8 billion, compared with US$80.3 billion in the third quarter of 2023.
Fourth-quarter daily average trading volume was US$1.278 billion.
Customer accounts reached 2.196 million at December 31, 2023, up from 2.008 million at December 31, 2022.
Customers with deposits reached approximately 904,600, and trading customers reached approximately 627,100 at year-end.
Total account balances increased to US$30.6 billion from US$14.0 billion at year-end 2022.
The company self-cleared more than 90% of U.S. cash-equity and options trading on its platform by the end of the fourth quarter.
Assets under management in the asset and wealth management business increased 420.9% year over year by the end of the fourth quarter, while the client base increased 163.9%.

Material changes versus the prior comparable period

Revenue recovered from the 2022 decline, but the mix shifted substantially from commissions toward interest income because of higher interest rates.
Commission revenue and trading volume declined despite growth in customer accounts and account balances.
The company returned to profitability, with net income of US$33.0 million versus a US$2.3 million net loss in 2022.
Operating expenses decreased, primarily because of lower marketing and branding and execution and clearing costs.
Operating cash flow reversed from a US$258.1 million inflow to a US$6.6 million outflow, mainly because of balance-sheet growth in trading assets and customer receivables and a reduction in customer payables.
Cash and equity increased, while convertible-bond carrying value rose modestly to US$156.9 million.
IPO underwriting activity declined materially. The company participated in four U.S. IPOs in 2023, compared with 26 in 2022, and 24 Hong Kong IPOs.
The company’s China app, “Tiger International,” was removed from the PRC application market beginning May 18, 2023, in connection with regulatory rectification requirements.

Guidance, outlook, commentary and unusual items

The company provided no quantified revenue, earnings or margin guidance. Management expects continued international expansion, broader brokerage and wealth-management offerings, increased institutional and corporate services, further self-clearing and continued investment in technology, artificial intelligence and automation. Management also noted that interest-rate movements, trading activity, capital-market conditions and regulatory developments may materially affect future results.

The CSRC stated that the company had conducted cross-border securities business for mainland Chinese investors without approval. The required remediation includes stopping incremental mainland customer acquisition and properly handling existing accounts. No loss provision was recorded because management concluded that the loss-contingency recognition criteria were not met.
The company relies on contractual VIE arrangements rather than equity ownership to control certain China-based operations. VIE revenue represented approximately 1.0% of consolidated revenue in 2023, but the structure supports important technology and operating functions.
The company disclosed prior customer complaints regarding personal-information leakage, although it reported no cybersecurity incident costs or material impact on reportable segments in 2021-2023.
FINRA completed an examination of TradeUP Securities in 2023 and identified compliance concerns relating to anti-money laundering and other matters. No final decision had been received by the filing date.
The Singapore Exchange inspection of Tiger Brokers SG regarding margin financing, risk management, capital, trust accounts, liquidity and funding remained ongoing, with observations not finalized.
The New Zealand High Court ordered Tiger Brokers (NZ) Limited to pay a NZ$900,000 penalty in June 2023 for historical AML/CFT breaches. A further FMA investigation following a November 2023 inspection was open as of the filing.
The company was a defendant in a class action filed in June 2023 concerning its PRC code of business, PRC regulations and risk disclosures. The case had been transferred to the Southern District of New York, and management stated that it believed the complaint lacked merit.
Management and KPMG concluded that internal control over financial reporting was effective as of December 31, 2023. The audit’s critical audit matter concerned the realizability of deferred tax assets.

Principal investor verification points

Verify whether the higher 2023 earnings base is sustainable after separating interest-rate benefits from recurring brokerage commissions and trading activity.
Monitor the CSRC rectification process, any additional penalties or restrictions, and the effect of limiting new mainland Chinese customers.
Assess liquidity and credit exposure using customer receivables, margin financing, collateral repledged, customer payables and regulatory capital requirements rather than cash alone.
Review the US$156.9 million convertible-bond balance, 2026 maturity, conversion terms and potential dilution.
Evaluate ongoing regulatory matters involving FINRA, the Singapore Exchange and the New Zealand FMA, as well as the U.S. class action.
Assess dependence on high interest rates, Interactive Brokers and other clearing and market-data providers.
Review the enforceability and regulatory status of the China VIE structure, cash-transfer restrictions and the US$84.3 million of restricted PRC net assets.
Track commission-rate compression, trading volume, customer engagement, account balances and the growth and profitability of wealth-management and ESOP services.
Consider the company’s dual-class structure: Class B shares represented approximately 3.9% of total share capital but 20 votes per share, and Tianhua Wu controlled approximately 55.5% of aggregate voting power.