Futu is a Tencent-backed Chinese-based online brokerage that is the equivalent of Interactive Brokers in China. The company parlayed its success in mainland China into expansion to Hong Kong, then international markets, achieving impressive growth over the past 3 years. Outside of China/Hong Kong, it currently operates in Singapore, Japan, Canada, Australia, US, and just entered Malaysia in February 2024. Future growth also abounds in Singapore neighboring regions like Indonesia and Thailand, Yet, despite the success and growing gross margin from 70% to 85% and EBITDA margin from 28% to 53% over the past 6 years, the stock trades at only 13.4x EV/2024 EBITDA (vs. 19x for IBKR and 17x for HOOD). Its stock price chart also appears flaccid after a parabolic run up from IPO price of $12/sh in March 2019 to $200/sh in Feb 2021 at the height of retail trading craze led by covid lock down. This period buoyed other brokerage stocks, but its effects were especially pronounced for FUTU which grew paying customers by more than 5x between 2019 and 2021 and more than quadrupled free cash flow over the same period. Then, the subsiding of the covid-trading fervor coincided with Chinese government's efforts to stem the country's capital outflow by restricting Futu and Chinese domestic competitors from onboarding new Chinese clients. In Oct 2021, the Chinese government first signaled that Futu and its direct competitor Up Fintech (Alibaba-backed) are operating cross-border online trading without adequate overseas trading licensing (which allows trading of non-Chinese securities and have been granted only to brokers that are tightly regulated by the government). In Dec 2022, the government officially banned Futu from onboarding new mainland Chinese customers. These series of blows from 2021 to 2022 pummeled the stock to back to $40/sh by the end of 2022 or 11x forward EBITDA at the time. Without the mainland China growth leg, the stock has languished in the 11-13x forward EBITDA valuation since.

 

However, I think there is lots to like about Futu and the numbers support this. Never mind the fact that its existing main land Chinese customers before the ban are still allowed to trade, Futu has adapted by pivoting to international markets, having penetrated several already with significant traction. Hong Kong is now FUTU's bread and butter market, accounting for 40-50% of overall growth. This market still has plenty of green spaces to run - as elaborated below. Futu also entered Australia in Mar 2022 and Singapore + Canada in Q3/23. The results so far from all these markets have been promising. The company also just entered Malaysia in Feb 2022, adding 100k registered users in 6 weeks post-launch. All these reflects in the numbers below. It's got decent competitive advantage on the technology front, anchoring it as one of the more stable competitors to capture the brokerage business in Asia. Bottom line, I think Futu will continue to execute on all front without the need of mainland China, so over the longer terms beyond just 1/2 years, it becomes a reasonable play on the advancing of the East Asian and adjacent capital markets. 

Hong Kong. This is Futu's bread and butter market, contributing ~40-50% of total company growth. Hong Kong presents attractive growth prospects because people are still migrating from traditional offline brokers to online brokerages. Although the majority of people in Hong Kong invest, only 1 in 5 adults uses online brokerage. Most of the brokerage business is still occupied by traditional offline brokerages, which holds the dominant market share. Yet these legacy brokerages are ceding grounds to online brokerage as both young and old users are turning to online brokerage. The younger users grew up exposed to online trading and defaults to online brokerages over traditional brokerages. This group has less earning power and so commands over smaller capital base, but are expected to grow AUM over their careers while likely staying rooted to the online brokerage model. The older users are patronage of the traditional brokerages. These users have much more capital invested and are slow to adopt change, but unlike some of the other Asian markets, even this older user base are relatively receptive to switching to online brokerages. Currently, 30-40% of growth in Hong Kong can be attributed to acquisition of this older user base. Hence, both groups present more business for the online brokers. The trend from offline to online brokerage is expected to continue in Hong Kong as the local government encourages such migration. Online brokerages thus stands in good stead in Hong Kong. There are several online brokerages in Hong Kong, all relatively new entrants compared to the traditional brokerages who've been operating in the island for decades. These online brokerages operates on an inherently different business model, offering users lower commissions, better access, trading technologies and convenience. Futu is already a market leader in Hong Kong because it's relatively early entry. Its most direct competitor is another Chinese brokerage called Tiger, which offers comparable services but still trails Futu. Both Futu and Tiger's success stem from low commissions, good trading platforms and a wide range of tradable products that are increasingly comprised of non-equities instruments like mutual funds, ETFs, money market funds, even PE funds. All these matter to the customers. The smaller online brokerages have technological gaps in their platforms, so can't match the same calibre of offering. New entrants in online brokerage in Hong Kong also faces high hurdles to succeed because the market is already quite saturated with numerous players and commissions continues to shrink. User acquisitions costs remains elevated. As recent failure of competitor has demonstrated, brokerages can't just buy new users but requires a organic brand awareness that takes much longer to foster. This is hard to do now after the early entrants have already anchored themselves in the market. The new frontier the online brokers are racing toward is to expand trading from traditional stocks to wealth management products like ETF, alternatives investments, etc which cater to high net worth individuals needing variety of products for portfolio diversification. In this regard, Futu has executed quite well, expanding wealth management products. Recent Q4/23 also reported that Wealth management total clients also increased 82% y/y accounting now for 12% of total client assets. The revenue growth in this market is double digits going forward.

 

Singapore. This market comprise of half a dozen foreign-based line brokerages + 10-11 Singaporean brokers. The Singaporean brokers have been operating in the country for decades and are predominantly local bank affiliated/backed. These guys offer brokerage services that are mostly high-touch, high commission, rudimentary in online trading abilities, slow accounting opening process. Out of the 11, like 4 are profitable (Phillip Securities, UOB Kay Hian, OCBC, Maybank Kim Eng). All these guys have other business like corporate finance that drives business to the stockbroking business. Revenue split from these brokers are are 50% from margin or interest income. Singapore brokers revenue is 80% Singapore securities trading, from which they are making decent money and no real rush to get into US stocks. In Mar 2020, Chinese online brokerage Tiger entered the Singapore market and successfully made inroad by offering a new approach of low-touch, high-tech, low comms, and fast accounting opening process. This attracted Futu which entered the market in 2021 and courted this market with the same strategy. Both Futu and Tiger grew significant user accounts during this 2 year period and both are comparable in offering. The 3rd Chinese online brokerage Webull came in 2022 after covid-led demand in trading had subsided and did not gain as much traction. Webull continues to aggressively acquire new users, but its tech and product offering are behind Futu and Tiger, so its acquisition strategy appears unstainable. Most of the trading business these Chinese brokers operate in Singapore are US equities (like 80%, while 20% are like Hong Kong and Singapore). Tiger has likely the largest market share with 2 million users and 400k active users. Futu has about 1 to 1.5 million users, active users base of 200-250k. Webull smaller at about 100-200k users and active ones of 10k. FUTU has about 15k Singapore paying users. Webull maybe 3-4k. In the other foreign brokers, US-based brokers like IBKR and Ameritrade don't deem Singapore a priority, so accounting opening process not as streamlined as Futu and Tiger. IBKR has 70k retail customers, 80% revenue from institutional customers in Singapore; clears $65 billion in annual trading volume. TD Ameritrade makes money from margin trading; clears about $15-$20 billion in annual trading volume. Saxo moved from retail broker to high-net worth broker; volume about $40 billion. IB and Saxo try to appease to institutional clients, deeply entrenched with asset management industry there. Futu has also been pivoting toward Singapore neighboring countris like Malyasia, Thailand, and Indonesia. In Singapore, Futu is also differentiating by courting users offline in malls and high foot traffic areas. This strategy has worked in Hong Kong, so the same prospects may hold for Singapore as well. Over the past several years, the Singapore retail trading market has been very competitive as many brokers trying to capture customers. The new frontier for all the brokers is developing a good wealth management platform (which offers trading non-stock securities for the wealthy, like bonds, mutual funds, etc). everyone targets different customers segments in wealth management. FUTU position itself as a SaaS and PaaS, capable of aggregating positions from other banks etc. IB and Saxo are just loading products, low cost model. Singapore local stockbrokers are behind in this endeavor, more limited offering. US brokers are focusing on institutions. Chinese brokers are focusing on family offices and ultra-high net worth already outside of China. Singapore brokers struggle with getting Chinese customers but leverage on their banking affiliations. This helps because Chinese like to bank with Singaporean banks. Singapore is a tough market. People have multiple accounts, but the pool of investors is stagnant and though people have multiple accounts, total switching from one to another is difficult. However, this is also an advantage for FUTU because it's already accumulated an good user base which should can be preserved much more efficiently than for new players to take away. FUTU is going after the ultra-high net worth individuals with $20+ million. The family office segment that FUTU is trying to capture with wealth management products is a hard one because banks still have more wealth management products than do online brokers, though Futu has been better than peers. As Futu adds more wealth management and trading products, its competitive against traditional brokers should grow, closing the gap in product offering while still offering advantages of better technology, execution and lower costs. In Q4/24, the Singapore division broke even for the first quarter while clients adds here were 30% of total for the quarter. Total aum and avg. aum grew 25% and 17%. Trading in japanese and Hong kong stocks are also in the process for Singaporean customers. Futu is also making headway with high net worth customers. Strategy is to create brand awareness and prioritize high net worth. It appears the strategy is working. I think there are still room for Futu to grow from a mid-tier player in the retail brokerage front while still crack open the high-net worth market. Margin financing right now isn't attractive because rates are too high, but Singapore will cut rates later this year, if it's a small cut, margin financing may be still too high to re-spark activities, and brokers make less money from deposits. if rates are cut to much lower, margin financing may come back. Retail segment mainly comprise of younger people. Older people / higher net worth people constitutes a stickier base at the traditional Singapore brokers that charge higher fees but offer more services, so it looks like because of strength and constraints, the Singapore brokers and Chinese brokers are vying for different customer segments. For new entrants, retention of new customers will be difficult.

 

Japan. The competitive landscape is comprised of 1) offline traditional brokers - serving stickier customers who retirees that trade less but have higher capital base, and 2) Japanese online brokers  For online brokers, retail trading profitability is driven by volatility. Most Japanese traders still trade Japanese securities equities as opposed to US equities. Translation and language barrier remains a problem for trading US equities. Incumbent Daiwa and Nomura make most of their money from the institutional side. Dominant online brokers are SBI and Rakuten. Commissions also going to 0 in the longer term. SBI and Rakuten are racing to the bottom with 0 commissions. Both are backed by other business that can fund their price cuts. Monex is following suit with the merger with NTT DOMO. Then there are foreign online brokers trying to break into this market. Online brokerage in Japan started in late 1990s and 2000s. The few companies that gave birth to this industry are the dominant player today, SBI Securities, Rakuten Securities, and Monex. Okasan came around that time as well. Offline brokers don't even attempt to contend with this dominance but focus on high net worth clients who do less trading. Historically, Japan has lower % of population in investing, number of accounts in Japan will probably stay flat as growth from younger generation will be offset by the overall population decline. However, 90% of trading volume is from online brokerage. A bottleneck seems to be number of US stocks are limited by online brokers. Online brokerage market is occupied by Japanese players. #1 and #2 are SBI (lots of products and superior margin trading preferred by professional investors) and Rakuten (good UI, UX and has point system). #3 is Monex but at 1/2 or 1/3 the size. #4 and #5 are Capcom and Matsui. There are also GMO and VMM. The brokerage business is riding on good macro tailwind on the back of rally in Japanese stock and the institution of the NISA program. Japanese government is trying to encourage more people to invest in the securities market, by enhancing the NISA program (now with greater tax exemption amounts). I think even with NISA program as the tailwind, Futu will continue to struggle here. NISA implemented by Japanese government encourage people to save and invest. 95% NISA accounts are young people using online brokerage. Japanese traders are more risk averse and most trade infrequently. For new comers, without backed by backs and other underlying business will make this business hard to compete in. Online brokers are still battling for market share. Challenging for foreign companies to come into Japan. Young people accounts average 3 million JPY. Older people that Nomura and Daiwa focuses on have 20 million JPY. Younger people portfolio allocation 70%+ US stocks + 10% crypto. Most young people already have online accounts, so growth will have to come from capital base. New NISA program offer allows for bigger accounts, so traditional security firms will vie for the pie against online brokers. Nomura, Daiwa, Mizuho, SMFG will likely take a piece of the action. US stocks fee at 25 bps, people think this is too high, so commissions on US stocks can still decline to drive customer growth. If commissions decline, revenue foregone must be made up by margin fees etc, but these would stem from more sophisticated products that the typical Japanese retail investor know little about and education on these is lacking, so online brokers must educate their base. Foreign companies have hard time succeeding in Japan because Japanese investors are sceptical of foreign companies handling their money (so this is definitely not good for FUTU. I wonder how prevalent would Japanese distrust a Chinese company). It's getting hard to get new accounts. Client acquisition cost for new customer is $150-$200. For FX trading it's $300 to $500, and crypto is $500. Customers have multiple accounts. NISA and Tokutei accounts are designated to only 1 account for tax purposes, so new brokers have to really differentiate themselves to become that one designated account. In Q4/23, Futu didn't achieve much tangible results other than continue to gain brand awareness and downloads. The company is supposedly going to introduce more US products and Japanese stocks. This will probably help but given Japanese traders' slower adoption, scepticism toward foreign brokers (especially since Futu is Chinese), I'd think Futu isn't going to gain great traction here.

 

Canada, Australia, and Malaysia. Futu entered Australia in Mar 2022, Canada in Q3/23, and Malaysia in Feb 2024. Though the company does not break down figures on a per market basis, it's stated that it's continued to gain market share in these countries. In Australia, Q1/24 earnings stated that market share increased and users growth is expected to on par with 2023 on an absolute basis. In Canada, Futu introduced in 2024 RSDP accounts for Canadian retirement accounts (equivalent to 401k in the US). This market is expected to an incremental driver in 2024 paying user adds of 400k. vs. 223k in 2023. In Malaysia, total registered users was 100k 6 weeks post launch. Assuming conversion to paying users in the high single digits (on par with Futu corporate), we are looking at almost 10k paying users already in March 2024. Futu is also aggressive with users acquisition by offering zero commission trading for 180 days after account sign up. With Futu's technology and infrastructure, it should be able to make inroads in the country competing against less local brokerages and against other international brokers including IBKR, Saxo, Oanda, etc.

 

Lack of control; Concentrated ownership. Public shareholders holds ~40% of economic interest but have only 5% of voting interest. Found Leaf Hua has controlling stake of 60% of votes and 36% of economic interest. Tecent has the remaining ~30% vote and 22% economic interest. No mistake that there is a lack of control discount on the stock.

Mainland China operation. Futu doesn't break down users or revenue by country, but I surmise that 50% or more of its overall business is still mainland China. This is a double-edged sword. Right now, investors feel the sharp end of the blade because the business is intentionally stifled by the Chinese government's preoccupation with stemming capital outflow. As a result, Futu and its competitors are barred from taking on new mainland Chinese customers or facilitate new international trading, which are substantive chunks of Futu's business and allure. As long as the Chinese government puts its thumb on Futu's mainland Chinese business, Futu won't grow much in China. This will weigh on the stock and its multiples.

 

Overall business profitability tied to the market conditions. This risk applies to not only Futu but to the brokerage business in general. In this business, profitability is largely a function of market volatility and valuation. Trading activities is positively correlated with volatility. And when the overall market appreciations, more people jump on the bandwagon in trading. On the contrary, when the markets do the opposite, trading activities atrophy and brokerage profitability gets squeezed. In the short term, Futu's long term prospects and good fundamentals can be overshadowed by the wax and wane of capital markets woes.

 

In a year in which brokers have appreciated, Futu has as well, but still looks undervalued on a relative basis to peers. It's got better historical and consensus growth, better and growing margins, even less leverage, but trades at less than half the PE multiples and 1-2x lower on an EV/forward EBITDA basis.

I think FUTU deserves 3-5x higher on an EV/EBITDA basis, that's 20% upside in the short term, but longer term, this should be a compounder.

 

 

 

Continued AUM and user adds. The executions in these foreign markets should continue to support the stock going forward.

 

China market recovery. The mainland China story is pretty much as bad as it gets. Short of war or economic collapse, FUTU's business there is stable, with existing customers trading but no new adds. Sure China is a blackbox, but if restrictions on FUTU and its broker peers ease or if China's overall economy recovers from this housing led slowdown, FUTU grows back one of its main leg for growth.

 

Hong Kong recovery. Half of current growth is fueled by adding # of users and trading volume growth in Hong Kong. The prosperity of the business here wax and wanes with the Hang Seng stock index. HSI dipped to 12 years low in late 2022 and has seen recovered a bit. 2024 has officially put HSI in a bull market as the index had been trading at its decade low valuation and the bear market has thawed. 2024 YTD, HSI recovered 14% by late March and is now experiencing a slight technical pullback, but I am of the view that capital inflow into HSI will continue. This should benefit Futu's Hong Kong business.

 

Rate cuts. Margin financing is a big part of brokerage business, accounting for 30% of its overall revenue. The relatively high rates have been inconducive to this business, but with rates coming back down, lending/securities financing should be helped. Of course rates should also be stimulative to higher market valuation, which also helps with brokerage businesses.