Brief China: Up Fintech (Tiger Brokers) Pre-IPO Quick Note – Much Too Reliant on IBKR and more

In this briefing:

1. Up Fintech (Tiger Brokers) Pre-IPO Quick Note – Much Too Reliant on IBKR
2. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018
3. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?
4. Global Bottoming Process Continues; Remain Overweight China
5. Tesla – Truth and Consequences

1. Up Fintech (Tiger Brokers) Pre-IPO Quick Note – Much Too Reliant on IBKR

Up Fintech (TIGR US) plans to raise up to US$150m in its US listing. The company counts Xiaomi Corp (1810 HK) and Interactive Brokers Group, Inc (IBKR US) as its main investors.

While TIGR has grown at a stupendous pace over the past three years, it has been able to do so owing to IBKR doing most of the heavy lifting of execution and clearing. While its trying to change that now, nearly all the revenue is still being driven by its IBKR affiliation.

I’ve covered some of the aspects of TIGR’s model in Futu Holdings IPO Quick Note – Comparison with Tiger Brokers – Same Market, Different Economics. In this insight, I’ll take a quick look at the company’s performance and the issues highlighted above. 

2. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018

• We believe the real main business line is service (commission), but not product (direct sales).
• In 4Q2018, service revenues grew by 46% YoY, but nominal main business line, product, grew only 20%.
• JD raised its commission rate in 2018, as demonstrating  that the company still has the bargaining power over retailers.
• Historical GMV numbers suggest significant upside.

3. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?

• The biggest positive surprise from Sea Ltd’s (SE US) conference call is strong 2019 adjusted sales guidance: 82%-97% YoY growth for Garena (digital entertainment division) and 117-127% YoY growth for Shopee (e-commerce arm).
• Management expects first positive quarterly EBITDA for Shopee Taiwan operations in 1Q19, indicating there is a path to profitability for Shopee’s business model.
• Another great news: management expresses high confidence that Shopee’s S&M expenses in terms of absolute dollars would trend down in 2019, vs. 2018.
• After a 35% daily share gain on 27 Feb, SE trades at 4.1x 2019E P/adjusted revenue excl. 1P sales, yet still a whopping 49% discount to Pinduoduo’s (PDD US) 8.1x P/S.

4. Global Bottoming Process Continues; Remain Overweight China

The MSCI ACWI and ACWI ex-US have managed to break above their respective 200-day moving averages, and are now bumping up against overhead resistance.  Supportive of a bottoming global market, cyclical Sectors are emerging as leadership. We examine the technical state of major developed and EM markets and highlight in today’s report and highlight attractive and actionable stocks within the Materials, Manufacturing, and Technology sectors.

5. Tesla – Truth and Consequences

Tesla’s problems aren’t going away, they’re escalating:

• Elon Musk is in trouble again with the SEC;
• Tesla’s brand-new general counsel is leaving after just two months on the job;

• Consumer Reports withdrew its recommendation on the flagship Model 3 due to serious quality and reliability concerns–not actually surprising given increasing risks I have tracked  with Tesla quality controls curtailed and flawed cars increasingly delivered to customers (see “Musk and Weird Q3 Developments Are Driving Investors to Telsa’s Rivals” and “Tesla – Dave’s Not Here, and Musk Won’t Leave” and “Tesla: Down to the Wire”).

• The 2018 10-K filing confirms Tesla’s operations still are not generating consistently sustainable profits or cash flow unvarnished by substantial boosts from accounting maneuvers and unusual items as seen with the “miracle” third quarter (see “Great Magic Trick Tesla; Now Do it Again“)
• Which is bad news for first quarter results already foundering with pricing cuts, rising costs, unhappy customers, and escalating demand pressure;
• Plus liquidity strain worsened by $920 million in cash due to go out on March 1st to pay off maturing convertible bonds.
• Tesla Shanghai Gigafactory construction is underway and yet still not fully funded after at least six months of negotiations with bankers, and thus may also be developing differently versus what Tesla has presented (adding to my previously noted concerns in “Tesla – Shanghai Surprise“).

The common theme here is that all these problems were preventable, avoidable, and unnecessary. 

That’s not going away any time soon–as long as Musk remains in complete control.

How long will that be? 

Good question–Read on as Bond Angle analysis continues.