Futu Holdings ($FUTU)
Sat 17 April 2021 – Matthew R. Hughes
Sources: Investor Relations, Oliver Wyman report, 2020 EOY Report, Credit Suisse global wealth report.
Futu Holding limited Snapshot
Ticker: FUTU
Share Price: $153.01
Enterprise Value: $21.27B
Company Description (As Per Website)
‘Futu is a technology company offering a fully digitized brokerage and wealth management platform. They are pursuing an opportunity to build a digital gateway to broader financial services by primarily serving the emerging affluent Chinese population. The company services customers through its digital platform, Futubull which has mobile, tablet, and desktop applications. It’s primary fee-generating services include trade execution and margin financing allowing clients to trade a wide range of securities. Futu also offers enriched trading experiences with market data, news, research, analytical tools, and they embed social media tools to create a network around its users.’
Market Opportunity
In the U.S, a number of mobile-first, user experience driven brokerages have been introduced since 2015 as the industry continues to shift deeply into the digital age. With more people born in the Internet-age accumulating wealth, companies like Robinhood, SoFi, and Square built platforms to manage different aspects of an individual’s financial profile -- including developing easy-to-use trading platforms. This trend is not exclusive to North America. This is why companies like Futu Holdings have seen massive jumps in user growth and revenue growth. Let’s explore why that is and what’s to come:
Chinese Stock Market v. U.S. Stock Market
Chinese exchanges were traditionally approval-based, rather than registration-based like in the United States. The approval process in China was long and the list of requirements for a company to go public on the Shanghai or Shenzhen stock exchange was exclusive of many firms. Part of the checklist was to show a history of profitability -- typically at least 2 years. Profitability requirements and long lock-up periods deterred many high-growth, unprofitable Chinese companies from listing domestically and many of those same companies ended up listing in the U.S. or Hong Kong. In 2019, the Shanghai stock exchange launched the STAR market, a registration- and disclosure-based market to attract the types of companies that had previously filed overseas. Today, there are still many Chinese companies listed in Hong Kong and the U.S. Prior to Futu there was no easy way for Chinese nationals to own shares of the companies listed overseas. Alibaba’s listing on the NYSE in 2014 fueled customer demand and paved a path for Futubull and its other mobile-first brokers like Webull.
According to a 2018 Oliver Wyman report, the market for China’s offshore online retail securities is expected to reach over $1.35 trillion in 2022. Based on the retail trading boom we have witnessed in 2020 and the beginning of 2021, this may be a conservative projection.
China: Total Household Wealth
According to a Credit Suisse global wealth report, the total household income in China was nearly $78T in 2019. The Chinese economy was impacted by the COVID-19 crisis, but has mostly recovered to pre-pandemic levels based on GDP. This growth is projected to be sustained in the future. Kerrisdale Capital estimates total household income in China in 2030 will exceed $200T. Historically, Chinese investors have allocated their wealth differently from their Western counterparts, holding a higher percentage of assets in real estate and bank deposits. These habits could change with more access to overseas markets.
Demographics: Mobile-First
Since $FUTU is focused on a mobile-first strategy, a large percentage of their user base is relatively young. This is a similar demographic to Robinhood which has scaled to over 13 million users and a $20B valuation in 2020. Robinhood’s average user is 31 years old and over half of its customers never traded before (https://www.nytimes.com/2020/07/08/technology/robinhood-risky-trading.html). Nearly 80% of the trading volume in China from 2016 to 2019 was attributed to retail investors.
The Credit Suisse Global Wealth report also projected the relative change in wealth per adult by region for 2021. The results project high relative growth in China and India (15% - 18%) and small relative growth in Asia Pacific (3% - 4%). With a presence in Hong Kong and China for Futu, Southeast Asia is a potential expansion market. Southeast Asia is severely underbanked, but a large portion of the population are daily smartphone users.
Market Risks
Since $FUTU is a non-US entity with a primary user base in China, there are many potential risks. I discuss in detail below:
Foreign Exchange (Forex) Rate Risk
Forex risk happens when companies engage in financial transactions denominated in any currency other than the currency where the company is based. Since the customers for Futu are based in different regions and trading on different stock exchanges, the company is exposed to some risk in exchange rates.
Trade War and Chinese Regulations
Uncertainty about China, global economic conditions, and regulatory changes pose a risk in most equities. Fintech and mobile technology in China are especially under scrutiny. The Chinese government also limits Chinese nationals to a foreign exchange quota of $50,000 USD per year for approved users only.
General Competition
Like we’ve seen in the western markets, there are a large number of brokerages to choose from these days with different features. It is no different in China. One of the main competitors has become increasingly popular in the US as well -- Webull. Webull is currently available in the United States, India, Brazil, Turkey, the Philippines, Malaysia, Japan, China, and Korea. Huatai, China’s 4th largest brokerage also built an online platform for offshore securities trading to try to take market share from the mobile-first brokerages as well.
$FUTU has grown revenues at an impressive pace -- especially in 2020 (2.9), Futu also grew their paying customer base by 136.5% year-over-year. Revenue numbers were also bolstered by market tailwinds like continued market volatility and the wave of high-profile Hong Kong IPOs of Chinese companies in technology, biotech, and property management sectors. Even with the market risks listed above, this type of growth cannot be ignored.
Futu Holdings Breakdown
Founder & Investors
Futu was founded in 2011 by Leaf Hua Li. He was employee #18 at Tencent ($TCEHY) in 2000 where he eventually founded Tencent Video before launching Futu. Futu launched a Hong Kong securities trading system in December of 2011 and has since grown into a premier mobile-first, digital investing and wealth management platform.
The ties to Tencent still remain as the Chinese tech giant owns 30% of the company. Futu also went through 4 rounds of private funding attracting investors like Sequoia (3.5% stake) and General Atlantic. On 16th February Morgan Stanley initiated an overweight stock rating with a price target of $253.00 triggering an extreme price appreciation from $159.49 to $191.00 in one trading day. It has since fallen to $183.35.
Users & Opportunities
Futu designed their platform to maximize user experience by integrating market data, social media features, and best-in-class trade execution in China, Hong Kong, and the US markets. Futu provides these services through its digitally integrated app called Futubull. The app includes trade execution, margin financing, market data, news, research, and analytical tools. In Futu’s NiuNiu Community, the Company’s social network services, users can exchange market views, watch live broadcasts, and participate in investment education courses – this community helps drive social engagement.
Futubull and NiuNiu mainly attract young, affluent Chinese investors. The average age of their clients is 36 years old and nearly 40% of its clients work in internet, IT, or financial services. Retail traders in China make up 80% of daily trading volume and as the younger population continues to urbanize and make money, Futu provides a platform to diversify their investments. Futubull has retained 98% of paying customers quarter over quarter during the 2020 bull run.
Futu has attracted 10.4 million users, 1.2 million registered clients, and 418,089 paying clients. The arduous Chinese process of registering for an investment account has hamstrung Futu’s conversion rate for turning its registered clients into paying clients. As those clients continue to pour into Futu’s platform, revenues are expected to continue growing at a rapid rate.
Financials
Futu went public on the NASDAQ in 2019 originally valued around $1B. The recent bull market, the popularity of mobile brokers, and an explosion in revenue ($122.1 million in Q3 2020 -- up 272% year over year) has contributed to $FUTU now being valued over $20 billion. Futu generates revenue in 3 main ways:
1. Commissions from trades (59.5%)
2. Interest income from IPO financing and margin financing (29.2%)
3. Other income from IPO subscription charges and underwriting fee income (11.3%)
Futu has been profitable since 2018 and continues to grow its margins. For reference, E*TRADE and TD Ameritrade were able to maintain 40% operating income.
The Bottom Line
Futu Holdings ($FUTU) is a high-risk, potentially high-reward trade, but one that I believe to be asymmetrically attractive below $225.
The company makes the majority of its revenue from commission fees which means swings in trade volume on the FutuBull platform has a large impact on the business. To mitigate these risks, Futu has expanded into IPO underwriting and corporate ESOP management to attract more customers and diversify around its trading platform.
At $190, $FUTU is trading at a $28.5 billion valuation, which is 50x our next twelve months (NTM) Gross Profit. Assuming their growth rate decreases steadily from 130-180% currently to 30% over the next ~7 years, this implies a 10x in revenue over that time period. If we are this bullish on their continued growth and TAM potential, $FUTU should be worth $300+.
