VENTURE FOCUS: Tiger Brokers Feeds on China Appetite for US Stocks
Bottom line: Tiger Brokers could see strong growth by banking on Chinese demand for US and Hong Kong stocks, but also faces some risk if Beijing decides to regulate the company as a financial firm.
I’m kicking off my new series on noteworthy venture-backed companies with the fast-growing Tiger Brokers, which is feeding off a Chinese love of stocks and growing demand for access to overseas markets. In the current climate where China’s own stock markets have become quite volatile and prone to big sell-offs, Tiger’s gateway to the US and Hong Kong stock markets could prove a potent draw to Chinese traders looking to diversify their portfolios with international stocks from more mature markets.
In a small but highly symbolic footnote to this story, Tiger is also finally giving Chinese investors access to many of China’s hottest companies that are traded overseas, including the Internet “big 3” of Baidu (Nasdaq: BIDU), Alibaba (NYSE: BABA) and Tencent (HKEx: 700). That could ultimately provide some upside for many of those stocks over the longer term, since Chinese investors are likely to boost trading volumes for many of these homegrown companies whose shares previously languished due to lack of familiarity among western investors.
The most exciting thing about Tiger has been its rapid growth since its founding less than 2 years ago, which reportedly has it targeting break-even status by the end of this year. That march to the profit column is even more impressive when one considers that it’s only 8 months since Tiger launched its flagship product, a Chinese smartphone app that allows for trading in US stocks.
Tiger added Hong Kong stocks to that mix this week, making more of China’s biggest names like Tencent, Lenovo (HKEx: 992) and China Mobile (HKEx: 941) accessible to mainland investors. (Chinese article) In announcing the move, it astutely noted the addition will allow stock enthusiasts to trade around-the-clock, switching back and forth between the US and Hong Kong.
The company certainly has a strong lineage in China’s Internet and finance communities, including its founder’s roots as an executive at online gaming giant NetEase (Nasdaq: NTES), one of China’s oldest Internet companies. Other founders come from the investment banking world, which was probably an important element in helping the company to navigate the tricky world of cross-border stock trading.
Tiger also landed an important backer last year when smartphone maker Xiaomi led its first major funding round that raised 100 million of yuan, or about $15 million. The company is now in the process of raising its second funding, and I would expect it might try to bring in some partners with a more financial background to complement Xiaomi’s high-tech roots.
Finance and Technology
From an investment perspective, the company looks particularly interesting because it combines technology and finance in a private sector company, a relatively rare combination in China. One of the most obvious alternatives in that space are China’s budding field of privately owned electronic payment companies, led by Ant Financial, the Alibaba affiliate whose main asset is its popular Alipay service.
Another fast emerging alternative is China’s vibrant field of peer-to-peer (P2P) lenders, which collect money from individual investors and then lend it to big companies. Chief among those are names like Jimu Box, whose backers also include Xiaomi and Singaporean sovereign wealth fund Temasek; and Lufax, whose backers include financial giant Ping An and which recently raised a whopping $1.2 billion in new funding as it steams towards a Hong Kong IPO as soon as later this year.
One of Tiger’s biggest advantages over those companies is its position as a technology company, at least in the eyes of Chinese regulators. That’s because the company technically doesn’t offer any China-based financial products or services, meaning China’s traditional financial regulators like the China Securities Regulatory Commission (CSRC) have no jurisdiction over the company.
Of course in an emerging country like China, that could change at any moment if one of the regulators decides it has such jurisdiction, which is one of the major risks that Tiger could face in the future. But for now at least, the company is being treated as a technology company in China, and gets its financial oversight from the US securities regulator.
Rapid Growth
Tiger hasn’t disclosed many financials or other business metrics so far, but the ones it has given look relatively impressive. Trading volume over the company’s platform has increased rapidly since service began, jumping nearly 10-fold from around 600 million yuan ($100 million) in its first month of service last August to around 5 billion yuan in March. That’s an important metric, since Tiger earns most of its money from transaction fees.
The company doesn’t say how many traders now use its service, but we can probably make some guesses based on the volumes. If we assume most of its customers are relatively heavy users who do perhaps $5,000 worth of trading each day, that would translate to about 50,000 accounts. That compares with one industry estimate of about 500,000 US stock buyers in China, which would give Tiger about 10 percent of the market despite its short history.
One of Tiger’s other big advantages is its connection with Xiaomi, a former high-flyer in China’s crowded smartphone market that has recently lost some of its luster but still remains a top 5 brand. That connection is likely to translate to future tie-ups that might see Tiger’s app get preferential placement on Xiaomi’s smartphones, as part of its broader drive to build up a wide-ranging online ecosystem of Internet-connected products and services.
Xiaomi also offers an interesting template of where Tiger could be heading if and when it decides to expand beyond China. Xiaomi also began its life as a China story, taking the local smartphone market by storm with its trendy and affordable models that it began selling in 2011. Since then the company has expanded into a number of developing markets like Southeast Asia, India and Brazil, positioning itself as a maker of high-quality affordable alternatives to pricier upscale models from Apple and Samsung.
It’s obviously still early days for Tiger, but such a similar path onto the global stage certainly looks like an interesting possibility as it develops expertise in making stocks from mature markets like the US and Europe available to buyers in emerging ones like China and India. Such a model would be relatively easy to expand at relatively low cost, and could hold big potential due to strong demand from developing market investors looking for better stability beyond their volatile home stock markets.
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- FUND RAISING: Didi Kuaidi, Ant Financial in Mega-Funding Blitz
- FUND RAISING: 55Tuan Debuts, Jimu Box Flexes P2P Muscle
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