Learning Resources

Investor Does Fundamental Analysis on FUTU Holdings (FUTU) - Stock Analysis For Beginners

13 Aug 2021

Transcript

01:15 About FUTU

FUTU Holdings Limited was founded in 2007 and is headquartered in Hong Kong. They operate as a holding company in digitized brokerage and wealth management platform in China, Hong Kong, the United States, and internationally.

Through their fully proprietary digitized brokerage platform, Futubull, it was built for retail Chinese investors and younger Chinese investors to make it easier for them to invest globally. This is because Chinese investors are increasingly interested to invest in global markets. For one, many top Chinese companies like Baidu, Alibaba, and Tencent are listed in US and Hong Kong. Besides that, the Shanghai and Shenzhen exchanges may have fewer opportunities in growth companies. Also, investing globally is good for diversification!

Catering to the Chinese investors, they specially designed the Futubull platform’s interface to fit Chinese investors’ preferences.

Other than that, through FUTU Holdings’ subsidiaries, they also offer a brokerage platform to investors outside of China. For those in Singapore, through FUTU Singapore, they offer a fully digitized brokerage service covering various markets via the online trading platform, moomoo app. It is also available for US-based investors.

As of 2019, the largest investor of FUTU is Tencent! In case Tencent needs anymore introduction, they are world's largest video game vendor and one of the most valuable companies in the world. Tencent also owns WeChat. Basically, they’re a big deal!

As for the largest shareholder of FUTU with 37% of shares outstanding, it’s the company's CEO and founder, Leaf Hua Li. Fun fact, he worked in Tencent for 8 years! He joined in 2000 and was the 18th founding employee of Tencent.

He was an early and key R&D participant in Tencent QQ and the founder of Tencent Video. In fact, FUTU’s former CTO also came from Tencent. He was the former head of Tencent QQ’s back-end services.

In December 2018, FUTU entered into a strategic cooperation framework agreement with Tencent’s subsidiary. In fact, Tencent founder Pony Ma also speaks highly of FUTU, praising the team’s high technological innovation capabilities.

03:18 FUTU Business Overview

So, how does FUTU make money? Well, they have three business segments.

First is Brokerage Commissions and Handling Charge Income. FUTU generates commissions and execution fees on securities brokerage. Handling charge income primarily consists of fees from settlement and dividend collection services. This revenue is driven by trading volume & commission rates.

Second is Interest Income. This consists of interest income from margin financing, bank deposit, IPO financing, and securities borrowing and lending services.

Third is Other Revenues. This is revenue from IPO distribution service like underwriting and new share subscription services. It also includes income from market data service & employee share option plan (or “ESOP”) management service income, and others.

As of 2020, the main revenue driver is brokerage commissions which represented 60% of total revenue. Next is followed by interest income and other revenues. Over the past three years, the company has been diversifying to reduce the heavy percentage of commission revenue compared to total revenue.

04:21 FUTU Growth Potential

Looking into the company’s growth, FUTU main markets are in mainland China and Hong Kong. However, in recent years, FUTU has started to expand abroad to countries such as Singapore and the US.

In terms of users, FUTU’s user base has grown from 5.6 million by end of 2018 to 7.5 million in 2019, and further to 11.9 million by end of 2020. In terms of monthly active users, it went from around 374,000 in 2018 to 1.8 million in 2020. Daily active users also increased from 151,000 in 2018 to 679,000 in 2020.

Not only that, FUTU’s client base has also grown. From 502,000 in 2018 to 1.4 million by end of 2020.

With the business moving forward, FUTU also benefits from these growth prospects.

First is the Growth In China's Offshore Retail Trade Volume.

Between 2015 and 2030, the proportion of affluent Chinese, which means the high & upper middle class, is expected to rise from 10% to 35% of the total population.

Chinese investors are also increasingly interested in investing in external markets. Combined with the increase in wealth, this will result in a rapid increase of trades or investments in global markets by Chinese investors.

From 2012 to 2017, the volume of trades in offshore markets by Chinese traders grew by a CAGR of almost 91%! From 2018 to 2022, the CAGR is expected to remain high at 35%.

Besides there, there’s also Rising Popularity In Wealth Management Products.

Globally, Assets Under Management worldwide is expected to increase to $145 trillionr in 2025 from $85 trillion in 2016. That's about 6.2% annual growth. Asia Pacific in particular will experience the fastest growth. It’s predicted to be 11.8% annual growth from 2020 to 2025. This growth is beneficial for FUTU since they’re expanding into the wealth management business. They will be able to attract more customers or cross-sell to existing customers.

For Alex Meter, I rate FUTU’s growth as great.

06:28 FUTU Moat

Now let’s talk about FUTU’s strength or competitive advantage.

I would say it’s their Network Effect. Apart from brokerage services, FUTU also their own in-app community. Investors can discuss about the stocks, talk about various topics like market trends, investment opportunities and share their portfolios. As the community and engagement grows, it attracts more investors to join the platform. This also creates more user-generated content. As the cycle repeats, it creates a network effect. By end of 2020, users spent an average of 37.8 minutes per trading day on FUTU's platforms. It increased from only 24.5 minutes in 2019.

Another competitive advantage is the Switching Costs. FUTU has quarterly retention rates of 98%. This means that almost all their customers are sticking to their platforms. This could suggest relatively high switching costs. For example, having to transfer positions or liquidate assets before moving to another platform. It can be costly in time and money, and it’s troublesome. Personally, I would HATE to have to do that and would avoid doing so.

Currently, FUTU has no huge competitors except for Up Fintech Holding, which many of you know as Tiger Brokers. Therefore, customer loyalty may not have been truly tested yet. They could jump ship if a new broker offers lower rates. The upside is that FUTU was founded in 2007 while Up Fintech Holding was founded only in 2014. It’s a good start that currently FUTU's customer retention is good, which can help them build a strong business moat for the future.

For Alex Meter, I rate FUTU’s strength as good.

08:03 FUTU Risks

There are also risks for FUTU, as with any other company.

One of it is regulatory risks. In terms of currency conversion, currently, the State Administration of Foreign Exchange (SAFE) has a strict limit on each Chinese citizen. They can only convert a maximum of Renminbi equivalent of USD 50,000 into any other foreign currency.

Since FUTU does not hold the related licenses in mainland China, this means their retail customers are bound by this law. While FUTU does not engage in currency conversion activities, they do not have control of how their clients convert the money. If regulators clamp down on currency conversion practices, it could affect trading volume in general.

And although FUTU doesn't have a brokerage license in China, their subsidiaries do have over 43 licences across key financial markets such as US, HK, Singapore et cetera. They’re also regulated by the SEC, FINRA, and several others. You can read more from their website.

Other than that, there’s also concentration risk to be aware of. Commission revenue makes up majority of FUTU’s total revenue which could also be unsustainable. Since FUTU adopts a low commission strategy, they were able to attract millions of customers to their platforms. However, commission fees in general are experiencing a downward trend.

According to Statista, the industry average commission fee in mainland China decreased from 0.126% in 2008, to 0.03% in 2019. It is likely that commission fees will continue to decrease in the long run. A few online brokers have even completely cut commission fees.

Commission revenue is also tied to the number of trades executed. So, fluctuations in the trading volume will directly impact commission revenues. A decrease in trading volumes could be due to uncontrollable factors like political conditions, changes in markets, economic downturns and more.

To deal with this, FUTU has to rapidly attract more customers, increase trading volume or reduce their reliance on commission fees by diversifying into other products & services.

Last but not least, there’s also risk in potential competition. FUTU is one of the leading low cost online brokerages in China. However, there are also many legacy brokerages in China that are older and bigger. Among the top 10 largest brokerages in the world, 7 are Chinese companies.

As new players join, they might also offer lower or no commission fees. FUTU may find it difficult to keep the customers or they would have to decrease their rates, which will hurt their revenue.

FUTU is also available internationally where they do face competition from other established players like Interactive Brokers, TD Ameritrade, SAXO and more.

10:49 FUTU Financial

For Alex Meter, I rate FUTU’s risk as mid to high risk.

Next on, let's look into the financial part of the business. Let's look into the profitability. Revenue and net income is growing strong with high gross profit margin and net profit margin. ROE is improving as well right now at 35%. However, do note that their debt to equity is at 2.56x which is extremely high this also explains why their ROE shot up so much. Of course, on positive side they are able to generate strong cashflow.

For Alex Meter, I rate FUTU’s financial as decent.

So, after watching my analysis, would you add FUTU into your watchlist?

To understand the company’s products even more, why not sign up for a FUTU Singapore securities account with moomoo app?

As you’ve learned, FUTU Singapore offers a fully digitized brokerage service covering various markets. Via their online trading platform, moomoo app, you can access US, Hong Kong, and Singapore stocks, China A shares, ETFs, REITs and more.

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Till then, I’m Alex and goodbye!