damircudic
Elevator Pitch
My rating for Futu Holdings Limited’s (NASDAQ:FUTU) shares is a Hold.
I previously reviewed FUTU’s financial results for the fourth quarter of 2021 in an article published on March 15, 2022. I share my latest thoughts on Futu Holdings in this article.
Futu Holdings has been working hard to diversify the company’s operations in terms of geography and business. But FUTU’s post-Q2 2022 results share price performance indicates that the changes to the company’s revenue and client mix aren’t perceived to be sufficiently significant at this point in time. As such, I maintain my Neutral view and Hold rating for FUTU.
Geographical Diversification
In my earlier mid-March 2022 update for Futu Holdings, I highlighted that FUTU faces regulatory risks relating to “its ability to provide offshore trading services to Mainland Chinese clients.” Recent metrics suggest that the company has done a decent job in trying to diversify its client mix.
According to the company’s Q2 2022 earnings press release, only a mere 10% of Futu Holdings’ new (paying) customer additions came from Mainland China. This represented an improvement from Q1 2022 which saw the Mainland Chinese market accounting for about a fifth of its new clients. In other words, FUTU’s efforts to reach out to investors in markets outside Mainland China, such as Hong Kong, Singapore, the US, and Australia appear to be paying off.
Specifically, FUTU has performed reasonably well in its efforts to expand its client base in the Hong Kong market, and there is potential for further growth. Futu Holdings revealed in its second-quarter media release that over “40% of Hong Kong’s adult population” are the company’s registered users (including both paying clients and non-paying users). Looking forward, FUTU noted at the company’s Q2 2022 investor briefing that its focus is on targeting “clients over 30 years old” in the Hong Kong market. In a nutshell, there is an opportunity for Futu Holdings to convert more of its non-paying users in Hong Kong into paying clients.
In summary, Futu Holdings has mitigated regulatory risks to a certain extent with the company’s ongoing geographical diversification efforts.
Volatility Isn’t Necessarily A Bad Thing
Previously, there were concerns that FUTU’s brokerage business will be negatively affected by a downturn in equity markets, but this hasn’t exactly been the case in reality.
In the second quarter of 2022, Futu Holdings saw its brokerage income increase by a very strong +30% YoY to HK$1,033.8 million. This was driven by both an increase in commission rate and US trading volume growth. At its Q2 2022 earnings briefing, FUTU explained that growing “contributions from the derivatives trading” (vis-a-vis equity trading) helped to increase overall commission rates for the company, while “leveraged and inverse ETFs” were responsible for the higher trading volume for the US market. This implies that market volatility has been a tailwind for FUTU to some degree, as this encourages the use of derivatives and ETFs among investors.
Moving ahead, future declines in equity trading volume due to weak investor sentiment might be partially offset by the increase in trading of non-equity financial instruments like ETFs or derivatives. As such, FUTU’s actual financial performance, especially relating to its core brokerage business, might be better than what investors expect.
Non-Brokerage Businesses
The growth in Futu Holdings’ non-brokerage businesses suggests that the company’s financial performance in the long run should be less reliant on the results of its core brokerage business as it was in the past.
A number of key operating metrics revealed in its most recent quarterly results press release offers an indication of FUTU’s progress in expanding the company’s non-brokerage businesses.
The Assets Under Management or AUM for Futu Holdings’ wealth management business grew by +59% YoY to HK$21.9 billion as of June 30, 2022. Cross-selling has been effective, with FUTU disclosing at its second-quarter earnings call that about 15% of the company’s paying clients for its brokerage business also purchased its wealth management products.
Separately, FUTU’s employee stock options or ESOP solutions business also witnessed a +97% YoY jump in its number of customers to 519 as of end-1H 2022.
The excellent operating performance of Futu Holdings’ ESOP solutions and wealth management businesses is encouraging. But this might not be sufficient to support FUTU’s share price, as discussed in the next section.
Futu’s Post-Earnings Stock Price Performance
FUTU’s stock price dropped by -22.7% since the company reported its second-quarter financial results at the end of August. The company’s shares have also done poorly on a relative basis, as the broader market as represented by the S&P 500 declined by just -7.9% in the same period.
In my opinion, Futu Holdings’ weak post-results share price performance suggests that investors want to see much more significant progress with respect to FUTU’s diversification plans. As it stands now, FUTU is still very dependent on the company’s core brokerage business, and Mainland Chinese clients are still a key component of its current client base.
According to its 6-K filing issued on August 30, 2022, other income (apart from brokerage and interest income) accounted for a mere 6% of FUTU’s revenue for the first half of 2022. It is no surprise that it will take a longer period of time for businesses like wealth management and ESOP solutions to become a more substantial contributor to Futu Holdings’ topline.
Separately, while FUTU continues to add more brokerage clients from markets outside Mainland China (90% of new additions in 2022), a meaningful proportion of the company’s existing brokerage customer base is likely to still come from Mainland China. A December 7, 2021 Reuters article quoted an analyst highlighting that “about 40% of Futu’s clients have opened their trading accounts with Chinese ID cards.”
Bottom Line
I continue to rate Futu Holdings as a Hold. I like FUTU’s geographical and business diversification efforts, but this remains a work-in-progress. I will consider upgrading Futu Holdings’ investment rating to a Buy in the future, if the company’s achieves better-than-expected progress in optimizing its client and revenue mix going forward.
Be the first to comment