WA CH A L - FUTU HOLDINGS LIMITED - CapitalWatch
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C A P I A L
W A C H
FUTU HOLDINGS LIMITED
PREPARED BY
HONGLAN CHENG, CFA | PETER FRANK | MINGYI XU
FUTU HOLDINGS LIMITED
Futu Holdings Ltd. Contents
Forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Sector: Financial Services
Industry: Investment I. Industry Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Sub-Industry: Online Brokerage
A. General Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
B. Global Investment Channels Increasing . . . . . . . . . . . . . . . . 4
C. The U.S. Remains a Dominant Market . . . . . . . . . . . . . . . . . . 4
D. China’s Rise in Investable Assets . . . . . . . . . . . . . . . . . . . . . 6
E. Chinese Investors Going Global . . . . . . . . . . . . . . . . . . . . . . 8
II. Futu Holdings Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
A. Futu’s Business Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
B. Extraordinary Growth and Profitability . . . . . . . . . . . . . . . . . . 10
C. Key Milestones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
D. Tencent As a Major Partner . . . . . . . . . . . . . . . . . . . . . . . . . . 12
E. Futu’s Competitive Strengths . . . . . . . . . . . . . . . . . . . . . . . . 14
F. Shift of Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
G. Faith in “Good Products” . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
H. Considerable Public Attention . . . . . . . . . . . . . . . . . . . . . . . . 21
I. Diverse Profile of Futu’s Users. . . . . . . . . . . . . . . . . . . . . . . . 23
J. Incredible Trust between Futu and Users . . . . . . . . . . . . . . . 24
K. Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
L. Industry Insiders’ Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . 27
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and seeks to do business
with companies covered in its
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investors should be aware that
the firm may have a conflict
of interest that could affect
the objectivity of this report.
Investors should consider this
report as only a single factor in
making their investment decision.
2 CapitalWatch Research - Futu Holdings Ltd.
Forward
This report is the outcome of a months-long investigation, research, and
analysis of Futu Holdings Ltd. and China’s online brokerage industry by
27 professional journalists and analysts from JPM Media Group across its
Beijing, Silicon Valley and New York offices. It differentiates from investment
banks’ reports by focusing on media reports and providing analysis from
the perspective of the media.
It collected and isolated relevant information from an extensive range of
reports on Futu Holdings and China’s online brokerage industry, conducted
in-depth analysis through investigations, verified the information authenticity
from multiple channels, and analyzed data from unique media perspectives.
We hope this report will provide you with sufficient and reliable information
to understand Futu Holdings and serve as a useful factor in making
decisions about your investments.
I. Industry Overview
A) General Introduction
The global securities market, estimated currently to exceed $100
trillion per year, is expanding rapidly as new technology and new
economic opportunities continue to develop around the world. The
market, which includes trading in stocks, bonds, equity and bond
funds, derivative securities, and other investments, has seen a 20
percent increase in just six years through 2018.
New technology, including rapidly growing digital channels, is
leading much of the increase with new investment vehicles being
made available for populations in all parts of the world. Indeed, online
trading alone – as a percent of overall trading volume – is estimated
to have grown from less than 16 percent of the entire market in 2012
to more than double that penetration, to 35 percent in 2018. During
that time, the online securities market, also aided by a change in
consumer preferences, has seen a compound annual growth rate of
more than 20 percent during those years.
While much of this growth has been brought by an expansion of
organic growth in global capital markets and concomitant trading
volumes overall, an increasing component of the larger securities
trading activity stems from a greater receptivity and appetite for
online services. By bringing traditional trading capabilities into
the hands of digitally-aware consumers, the industry has seen an
aggressive expansion of new entrants in every continent.
Underpinning this customer receptivity are the developments of
new technologies, including heightened and sophisticated internet
security, which frees consumers to utilize these services with more
confidence; the development of artificial intelligence, which assists
in guiding and securing transactional information and preferences
among consumers; and, new cloud capabilities, which integrates
an infrastructure that permits the storage of big data with a global
accessibility.
As a result, operating and transactional completion costs continue to
decrease, lowering consumer costs and the hurdles that traditionally
limited micro- or small-investment thresholds. Efficiencies in all areas
have opened these securities markets not only to new companies
and facilitators, but to new customers and trading platforms.
CapitalWatch Research - Futu Holdings Ltd. 3
FUTU HOLDINGS LIMITED
B) Global Investment Channels Increasing
We see several trends emerging worldwide within the securities
industry.
Among the most impactful is the shift from the traditional
bricks-and-mortar business model to online services. While this trend
has accompanied the growth of the internet overall for the past 20
years, the speed of growth and the increasing acceptance of online
and mobile trading platforms has accelerated in recent years.
As such, various new industry players are entering the online
brokerage market, primarily large internet operators that are able
to fund the significant investments necessary to enter the industry.
Although the cost of entry is relatively small, the security needed
to build out infrastructure, as well as operate within the various and
strict international regulatory requirements, remain a serious barrier
to many smaller firms.
In addition, the increasingly complex level of asset classes, capital
requirements, customer identity security measures, and flow-of-funds
restrictions require significant management expertise and experience.
Notwithstanding those substantial requirements, as consumers
become more accustomed and familiarized with various alternative
investment channels, the user experience becomes increasingly
paramount in the development of the industry. Each of these
components require changing and newly developed strategic
revenue-driven business models that augment the user experience
and combine to ensure a platform that can deliver long-term value.
This rapid development and maturation of the industry is not likely
to slow any time soon. With each new capability and furtherance of
technological developments, increased competition will continue.
In addition, customers will become increasingly expectant of new
alternatives, which in turn, will continue pressure among competitors
to develop and offer additional ancillary services that serve to
differentiate products and value-added services.
C) The U.S. Remains a Dominant Market
With securities markets expanding around the world, the United
States remains among the top destinations for capital.
Technological advances, primarily driven by development within, and
pioneered by, corporate research inside the U.S., has translated into
vigorous growth within that market.
Today, the U.S. is among the leaders in the rapidly growing online
securities markets. According to iResearch Report, the market
size of online brokerage services was expected to reach nearly $7
trillion last year, representing roughly 15 percent of overall volume
on the market. And the market is expected to continue expanding,
increasing by nearly one-third in the next five years.
4 CapitalWatch Research - Futu Holdings Ltd.
With immense liquidity and transaction capabilities, securities
markets in the U.S. continue to dominate for corporations and
investors seeking capital placement. Much of that trading today has
shifted, and continues to migrate, to the various online platforms.
ONLINE SECURITIES TRADING VOLUME IN U.S.
10
9
8
7
6
In $Trillions
5
4
3
2
1
0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Retail 3.8 3.9 4.1 5.2 5.1 5.8 7.5 7.8 8.1 8.3 9.1 9.4
Institutional 1.7 2.1 2.6 2.9 2.9 2.8 4.2 4.4 4.6 4.8 5.3 5.5
Source: Company Data, CapitalWatch Research
In particular, the retail market for trading accounts in the U.S. is
robust and growing, nearly two-thirds of online trading volume is
initiated by retail accounts, which represent more than one-fifth of
overall trading volume. That volume, and its size relative to the overall
market, is expected to increase as new technologies and newly
integrated products and services give rise to increasingly lower
trading costs and market entries.
The New York Stock Exchange and the Nasdaq Stock Market are
today among the top destinations for securities trading. The ease of
capital inflow and interborder financial transactions has brought an
increasing volume of capital from overseas markets to the United
States exchanges.
CapitalWatch Research - Futu Holdings Ltd. 5
FUTU HOLDINGS LIMITED
D) China’s Rise in Investable Assets
Among the top originating countries for investors’ funds has
increasingly been China, which has seen an explosive growth in
recent decades among a burgeoning mass affluent class in the
population.
China, as the world’s second-largest economy, is expected to see
its gross domestic product jump from 61 trillion yuan in 2013 to an
anticipated 108 trillion yuan by 2022.
At the same time, the country’s population has shifted dramatically
to urban centers, which represent nearly 60 percent of Chinese
inhabitants. The shift to urban centers has also led to a rise in
disposable income, which has grown at a compound annual rate
of nearly 8 percent over the past five years. Among the results of
the urbanization has been a shift of household wealth to real estate
holdings, which have become a substantial category of investment,
representing more than 70 percent of the overall asset value.
NUMBER OF CHINESE-BASED INVESTORS WITH
OVERSEAS INVESTMENT
70 66.3
60
51.2
50
41.6
In Millions
40
33.1
26.6
30
20
20 14.3
9.7
6.4
10 5.1
3.2 4.1
0
2010 2012 2014 2016 2018 2020 2022 2024
Source: Company Data, CapitalWatch Research
6 CapitalWatch Research - Futu Holdings Ltd.
With this rapid expansion of wealth has come an equally rapid
expansion in the desire for wealth management services as
investable assets have been more than doubled to nearly $25 trillion
over the past six years. That market, which is expected to increase
an additional 80 percent in coming years, has meant an enormous
opportunity for additional products and services in mainland China
and Hong Kong.
This aim for diversification has resulted in an increasing desire for
investment opportunities in markets outside the Chinese investors’
home country as investor allocations to foreign markets expands
rapidly.
Much of these overseas transactions are facilitated increasingly by
the online retail securities industry, which has seen rapid growth over
recent years, reaching nearly a half-trillion dollars, and is estimated
to continue growing more than 30 percent annually during each of
the next five years.
Augmenting this push for investable assets in diverse markets
has been the rise in the number of Chinese-based corporations
seeking liquidity and exposure on stock exchanges in non-domestic
geographies. In particular, the securities markets in the United States
and Hong Kong have been favored locations for companies located
within the PRC. Indeed, Hong Kong is of particular interest to Chinese
investors, given its cultural similarities, geographic placement, and
relatively large composite of Chinese-listed companies. Estimates
are that nearly 80 percent of trading volume on the exchange are
attributable to Chinese companies, according to figures from the
Hong Kong Stock Exchange.
This broadening of geographies has coincided with government
policies, including its Made in China 2025 and the Belt and Road
initiatives, resulting in the internationalization of the Chinese yuan
and investment that flows both inward and outward from the country’s
borders.
CapitalWatch Research - Futu Holdings Ltd. 7FUTU HOLDINGS LIMITED
E) Chinese Investors Going Global
Further, as the economics of the growing affluent class in China
increases, the limited investment opportunities within China and the
economic growth witnessed in other parts of the world continues to
attract funds into global markets.
As these funds flow outward, securities including stocks, bonds, and
mutual funds receive the bulk of investment, with more than $260
billion allocated currently in overseas investments.
Of these international markets, the Hong Kong market is positioned
as a dominant destination and recipient of transactional funding
behind the United States, while the exchange itself has seen market
for initial public offerings place it second among exchanges. The
market’s trading volume of more than $2 trillion, which has expanded
by nearly one-third annually in recent years, is expected to approach
$4 trillion by 2023. Transaction volume stemming from retail channels
accounted for more than $1 trillion last year.
ONLINE SECURITIES TRADING VOLUME IN HONG KONG
2,500
2,000
1,500
In $Billions
1,000
500
0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Retail 138 199.8 286.2 694.8 503.6 795.5 1,170.4 1,325.4 1,510.8 1,705.9 1,918.9 2,169.7
Institutional 266.5 359.8 519.3 685 519.4 784.7 933.7 1,031.3 1,144.1 1,254.4 1,366.8 1,493.5
Source: Company Data, CapitalWatch Research
8 CapitalWatch Research - Futu Holdings Ltd.In similar ways to the markets in the United States, the rapid growth
in the Hong Kong online securities markets is being driven by ease
of market access and lower price points for trading accounts and
transactions. The share of trading volume generated by the local
population continues to expand with a nearly tenfold increase in
volume generated from Hong Kong investors in the past six years. At
the same time, with the introduction of “Shanghai-HK connect” easing
transactional flow between the two exchanges, the volume of trading
from the mainland is predicted to witness a nearly hundredfold
expansion from 2012 to within the next five years.
With the rise of investor interest and activity, the universe of online
brokers – as is apparent in the U.S. and Europe – has also expanded
in local markets in recent years, more than doubling to nearly 300
brokerage participants by 2016. As is seen elsewhere, the typical
online broker business consists of operations from within existing
commercial banking institutions, entities that provide both online
and offline sales and transaction-fulfillment channels, and dedicated
online firms.
Given the expansion of investment opportunities as well as investor
access, the online brokerage industry in Hong Kong is anticipated
to increase dramatically, accounting for roughly $150 billion in total
trading volume last year.
II. Futu Holdings Ltd.
A) Futu’s Business Model
Futu Holdings Ltd. is an advanced FinTech company transforming
the investing experience by offering a proprietary cloud-based
brokerage platform, primarily serving the emerging affluent Chinese
population through its fully licensed securities brokerage firm from its
headquarters in Hong Kong.
According to the company’s prospectus filed with the U.S. Securities
and Exchange Commission, some of Futu Holdings’ subsidiary
companies hold SFC type 1, 2, 4, 5 and 9 licenses and is registered
as a broker-dealer with the SEC and is a member in good standing of
U.S. FINRA.
Similar to other online brokers, Futu Holdings, through its fully
digitized brokerage platform, Futu NiuNiu, provide users with trade
execution for stocks, warrants, options and exchange-traded funds,
margin financing, market data and information, and social networking
services for three major markets including Hong Kong, U.S., and
Chinese A-share listed stocks through Shanghai and Shenzhen Stock
Connect.
Apart from its main business of serving as a securities and options
brokerage, Futu Holdings also provides corporate services to
institutional clients, which includes establishing and administering the
platforms of their employee stock option plans (ESOP) and providing
IPO subscription services to many listed companies.
The platform’s interface is specially designed to fit Chinese
investors’ preferences and it provides free live stock trading data to
China-based investors that is only available to VIP clients on other
platforms. Users can open an account online in five minutes and
begin trading and reading live market information that is available on
the NiuNiu platform.
CapitalWatch Research - Futu Holdings Ltd. 9FUTU HOLDINGS LIMITED
The live data is not restricted to the Hong Kong stock market.
Starting in 2019, investors in China who trade U.S. equities can
use Futu’s NiuNiu app to access Nasdaq TotalView for free, which
displays real-time traded prices and full order book depth for market
participants.
Over recent years, Futu has launched several new services to satisfy
clients’ needs, including one-click new share subscription, after-hours
trading, mainland cross-border stock trading, and IPO subscription
using collateral. In addition, Futu rolled out a series of discounts
and special offers during holidays, including zero-commission,
zero-deposit IPO subscriptions, and low margin fees.
These improvements, though relatively minimal, are seen as critical to
Futu staying ahead of big traditional brokerage firms and banks, like
Bank of China and Haitong International Securities, that are lowering
fees to compete, as well as other startups offering zero-commission
mobile or online trading.
“Futu provides one-stop service for clients’ all investment needs, and
unlike our competitors, Futu has developed front-end stock trading
software, customer management system and back-end clearing and
settlement system all by ourselves,” said Hua Li, founder of Futu
Holdings. “We have developed full-chain closed loop infrastructure.”
In short, the company aims to build an app that enables clients to get
everything they need for their investment without walking into a local
bank or brokerage firm.
B) Extraordinary Growth and Profitability
Most investors are interested in the Futu IPO because of the
extraordinary growth in its business and its profitability.
Benefiting from the emergence of a mass affluent class in China
that has strong demand for overseas wealth-management services,
Futu’s user base (including those who opened trading account but
have not yet deposited any assets) has grown from 3.2 million as of
Dec. 31, 2016, to 3.9 million as of Dec. 31, 2017, and further to 5.6
million as of Dec. 31, 2018. The company’s monthly average users
(MAUs) have increased from 175,383 in December 2016 to 304,660
in December 2017, and further to 374,692 in December 2018. Its
average number of daily average users (DAUs) jumped from 45,733
in December 2016 to 151,700 in December 2018.
Although the growing number of users are not fee-paying clients, they
remain a critical source of data for the NiuNiu platform, a pipeline
for growing the company’s fee-paying client base and serving as the
foundation of its NiuNiu social community.
As of Dec. 31, 2018, the company had more than 502,000 registered
clients and more than 132,000 clients with assets in trading accounts.
For the year ended Dec. 31, 2018, the company recorded HK$907
billion ($115.8 billion) in total trading volume for client. According to
research by Oliver Wyman, the company ranks fourth among Hong
Kong online retail brokers in terms of online brokerage revenue for
the six months ended June 30, 2018. Also, Futu held HK$50.9 billion
(US$6.5 billion) in client assets at the end of the period.
10 CapitalWatch Research - Futu Holdings Ltd.FUTU NET INCOME (LOSS) VS UP FINTECH NET INCOME (LOSS)
30,000
20,000
10,000
0
US$ in thousands
-10,000
-20,000
-30,000
-40,000
-50,000
2016 2017 2018
Futu Holdings ($12,801) ($1,053) $17,689
Up Fintech (Tiger Securities) ($10,811) ($7,927) ($44,294)
Source: Company Data, CapitalWatch Research
Among the more interesting aspects of the company is that Futu has
succeeded in turning a profit while its direct rival Tiger Securities,
which filed for an IPO with the U.S. Securities and Exchange
Commission a month after Futu, is far from breaking even.
In 2018, Futu’s revenue reached HK$811.3 million (US$103.6 million),
representing a 159 percent increase from the year before. Net
income for the year was $17.7 million, or 1 cent per share, compared
with a net loss of $1 million for the same period in 2017.
By comparison, Up Fintech Holding Ltd., which operates under the
name Tiger Securities, saw its revenue nearly double year-over-year
to $33.6 million in 2018. However, the company’s net loss reached
$44.3 million compared with a loss of $7.9 million for the prior
year. The company’s management has said it did not expect Tiger
Securities to break even any time soon.
“We may also continue to incur net losses in the future due to
changes in the macroeconomic and regulatory environment,
competitive dynamics and our inability to respond to these changes
in a timely and effective manner,” Up Fintech said in its prospectus.
CapitalWatch Research - Futu Holdings Ltd. 11FUTU HOLDINGS LIMITED
C) Key Milestones
2018
July 2018 – Became the first licensed brokerage company to provide
completely online-based trading account opening services among
leading players in Hong Kong.
January 2018 – Registered in the U.S. as a broker-dealer, became a
FINRA member, and opened an office in Palo Alto, California.
2017
May 2017 – Completed series C round of venture capital financing.
2016
October 2016 – Became one of the first brokerage companies
globally to offer free real-time Level II Hong Kong stock quotes to
China-based clients.
2015
May 2015 – Completed series B round of venture capital financing.
2014
October 2014 – Completed series A round of venture capital
financing from Tencent, Matrix and Sequoia Capital.
September 2014 – Integrated with the U.S. capital markets and
began offering real-time stock quotes on major U.S. exchanges.
2012
October 2012 – Obtained a Type 1 License for dealing in securities
from the HK SFC and commenced the operation of its online
brokerage business.
2011
December 2011 – Launched its proprietary Hong Kong securities
trading system supporting the execution of securities trades within
0.0037 seconds.
D) Tencent As a Major Partner
Futu has raised millions of dollars in its most-recent funding round
from Tencent, Sequoia Capital, and Matrix Partners China, which
occurred in May 2017. Among these top three investors, Chinese
tech titan Tencent is the largest shareholder holding a 34.2 percent
stake in the unicorn after the offering.
In addition to being a primary investor in Futu, Tencent is also a key
supporter of the company. Leaf Hua Li, founder and chief executive
officer of Futu was Tencent’s 18th employee. He joined Tencent
in 2000 and was an early and key research and development
participant in Tencent QQ and the founder of Tencent Video. Futu’s
chief technology officer, PPchen Weihua Chen, also came from
Tencent. He was the former head of Tencent QQ’s back-end services
and led multiple system restructuring projects of Tencent QQ with
hundreds of millions of simultaneous online users.
12 CapitalWatch Research - Futu Holdings Ltd.According to the prospectus, in December 2018, Shenzhen Futu, one
of the company’s operating entities in China, entered into a strategic
cooperation framework agreement with Shenzhen Tencent Computer
System Co. Ltd., a subsidiary of Tencent. Pursuant to the agreement,
Tencent agreed to cooperate with Futu in traffic, content, and cloud
areas through Tencent’s online platform. In addition, Futu and
Tencent agreed to further explore and pursue additional opportunities
for potential cooperation in the area of fintech-related products and
services to expand both parties’ international operations.
SALES AND MARKETING EXPENSES
AS A PERCENTAGE OF REVENUE
900,000 90
811,343
800,000 80
68.00%
700,000 70
600,000 60
500,000 50
400,000 40
311,663
300,000 30
200,000 20
13.30%
12.10%
87,015 98,062
100,000 10
59,198
41,446
0 0
2016 2017 2018
Selling & Marketing Expenses (in thousands, and HKD$) 59,198 41,446 98,062
Total Revenue (in thousands, and HKD$) 87,015 311,663 811,343
Expenses vs. Revenue Percentage 68.00% 13.30% 12.10%
Source: Company Data, CapitalWatch Research
Leveraging on its efficient online trading system and support from
Tencent, Futu’s sales and marketing expenses as a percentage of
its revenue have dropped significantly as the firm has scaled its
operations.
Looking ahead, the involvement of Tencent could be invaluable.
According to the chart below, WeChat, a social networking app
developed by Tencent, has over 1 billion monthly active users (MAU)
worldwide as of August 2018, and the number is approaching 1.1
billion.
CapitalWatch Research - Futu Holdings Ltd. 13FUTU HOLDINGS LIMITED
NUMBER OF MONTHLY ACTIVE WECHAT USERS
1,250
1,082
1,057.1
1,040
1,000 989
963 980
938
889
Number of accounts in millions
849
806
762
750
697
650
600
549
500 500
468
438
396
336 355
250 235.8
209.6 194.4
151 160.8
100
50
0 14
Q 1
Q 1
Q 2
Q 2
Q 2
Q 2
Q 3
Q 3
Q 3
Q 3
Q 4
Q 4
Q 4
Q 4
Q 5
Q 5
Q 5
Q 5
Q 6
Q 6
Q 6
Q 5
Q 7
Q 7
Q 7
Q 7
Q 8
Q 8
18
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
3’
4’
1’
2’
3’
4’
1’
2’
3’
4’
1’
2’
3’
4’
1’
2’
3’
4’
1’
2’
3’
4’
1’
2’
3’
4’
1’
2’
3’
Q
Source: Statista
As a result, depending on the scope of the overall collaboration, Futu
could benefit immensely by using WeChat as a channel to reach
billions of potential Chinese clients in a very cost-efficient manner.
Tencent founder Pony Ma speaks highly of Futu. “The Futu team
all born with Internet genes with high technological innovation
capabilities,” said Ma. “They continue to pursue its mission to
re-define traditional investing with proprietary technologies and a
relentless focus on user experience.”
“The team is focused to enhance its product and try to create its
own core competitiveness. In fact, Futu is very similar to Tencent,
designing good products is the most crucial element for our
success,” said Ma.
E) Futu’s Competitive Strengths
Headquartered in Hong Kong, Asia’s financial hub, Futu is no
stranger to competition. Traditionally, top players in the brokerage
market were large financial institutions, like HSBC and Bank of
China, and established brokerage houses, like CHIEF and Bright
Smart Securities. Today, however, online brokers – those exchange
participants that offer online trading services to retail investors – are
growing so quickly that they are expanding from 30 percent to 54.7
percent of the total number of brokers from 2007 to 2016.
14 CapitalWatch Research - Futu Holdings Ltd.Moreover, according to iResearch Report, with the increasing need
to trade efficiently, the customer base that chooses to trade through
online brokers will grow at a faster pace than that through traditional
brokers.
Despite the keen competition in the securities, futures, and options
brokerage industry, we believe that the competitive strengths of Futu
will enable the company to compete effectively. The reasons for this
include:
i. Futu’s Subsidiary companies hold SFC type 1, 2, 4, 5 and 9
licenses and a broker-dealer with SEC and FINRA member.
Futu, ranked fourth among Hong Kong online retail brokers in
terms of online brokerage revenue for the six months ended
June 30, 2018, is one of the few pure-play online brokers with
its own license in Hong Kong. This means Futu has its own
clients, assets, and clearing abilities. Many other popular
internet brokers have no “real” clients. For example, newly
released Snowball Securities and Futu’s direct rival Tiger
Securities both rely heavily on collaboration with their primary
clearing agent, Interactive Brokers, to execute, settle, and
clear a substantial portion of the trades in U.S. and Hong Kong
stocks and other financial instruments. This is their biggest
challenge. They do not actually hold client assets.
The result is that all these other firms can do is to serve as
an agent, which does not permit a substantial pricing power,
arguably the single-most important decision in evaluating a
business.
“We believe that our relationship with Interactive Brokers is
critical to our business. If we need to enter into alternative
arrangements with a different clearing agent to replace our
existing arrangements, we may not be able to negotiate a
favorable alternative arrangement,” Tiger Securities warned
in its latest prospectus. “Transitioning to a new clearing agent
is time-consuming and may affect the user experience or, if
our platform becomes inoperable, may result in our inability to
facilitate trades through our platform.”
ii. Futu has its proprietary execution and clearing system, which
represents extensive know-how and a high technical barrier for
entry.
Designing a system that includes proprietary execution
and clearing comes with additional risk and large costs.
Regulatory scrutiny from the Hong Kong Securities and
Futures Commission and the U.S. Securities and Exchange
Commission are both high, and the more Futu brings in-house,
the more security work it must do.
Over the past eight years, Futu has made significant
investments in its technology platform, which has evolved
into a highly automated, multi-market, closed-loop technology
infrastructure that drives every function of its business,
including trading, risk management, clearing, market data,
news feeds, and social functions.
CapitalWatch Research - Futu Holdings Ltd. 15FUTU HOLDINGS LIMITED
This proprietary system has a significant cost. As of Dec.
31, 2018, approximately 65 percent of Futu’s workforce was
dedicated to research and development, and the majority of
them have work experience at leading internet and technology
platforms. Research and development expenses grew more
than 50 percent to HKD$95.5 million in 2017 from HKD$62
million. It jumped nearly an additional 60 percent in 2018 to
more than HKD$151 million.
However, as the company grows, Futu’s research and
development expenses as a percentage of its total revenues,
which measures the percentage of sales that is allocated to
R&D expenditures, dropped to 30.7 percent in 2017 from 70.8
percent in 2016. It dropped further to 18.6 percent in 2018,
illustrating a driving factor behind its expanding margins.
RESEARCH AND DEVELOPMENT EXPENSES
AS A PERCENTAGE OF REVENUE
900,000 90
70.80% 811,343
800,000 80
700,000 70
600,000 60
500,000 50
400,000 40
311,663
300,000 30
30.70%
200,000 20
18.60%
151,097
100,000 87,015 95,526 10
61,624
0 0
2016 2017 2018
Research and Development Expenses
61,624 95,526 151,097
(in thousands, and HKD$)
Total Revenue (in thousands, and HKD$) 87,015 311,663 811,343
Expenses vs. Revenue Percentage 70.80% 30.70% 18.60%
Source: Company Data, CapitalWatch Research
16 CapitalWatch Research - Futu Holdings Ltd.In comparison, Tiger Securities listed no R&D expenses on its
financial statements, only growing marketing and branding expenses.
It has explained in an interview that Tiger Securities focuses on
continuously improving UI (user interface) design amid Chinese
customer feedback. UI design is important in terms of attracting more
clients, but it can be easily copied by its competitors. Designing
in-house systems might seem unnecessarily costly at first, but it
could bring massive cost-savings in the long run.
Although spending on R&D is not directly linked to growth in sales
or profits in the short-run, it does demonstrate the company’s unique
positioning and increased innovation, which could potentially boost
Futu’s reputation and income in the long run. Moreover, since Futu is
not depending on a third party, it can control its own destiny.
We believe Futu will continue to make investments in research and
development and technology to create a higher technical barrier for
entry and to enhance its platform to address the diverse needs of
clients and improve operating efficiency. As a listed company, it will
also be easier for Futu to attract talented IT professionals globally
to join the R&D team with different share-based compensation
programs.
iii. People prefer to do business with like-minded people.
Apart from Tiger Securities and Snowball Securities, which are
designed by mainland companies, there are some major online
retail brokers based in Hong Kong that have a long history and
have served the diverse community of Hong Kong retail investors.
According to research by Oliver Wyman, below are the top seven
online retail brokers in Hong Kong, based on estimated online
brokerage revenues derived from retail investors for the six months
ended June 30, 2018. The ranking only shows exchange participants
with trading seats in the Hong Kong Exchange.
• Hongkong and Shanghai Banking Corp. (HSBC)
• Haitong International Securities (0665.HK)
• Bank of China (Hong Kong)
• Futu Holdings
• Interactive Brokers
• Bright Smart Securities (1428.HK)
• Huatai Financial Holdings
Among the seven, HSBC and Bank of China are the major
international banks that offer comprehensive full banking and
investment services to high net worth clients. Standard trading
fees for HSBC, for example, typically range from 0.25 percent to
0.4 percent of the transaction amount per transaction, depending
on whether trading is conducted through manned phone-banking
and branch or through mobile banking. There is usually a minimum
charge of HKD$100.
CapitalWatch Research - Futu Holdings Ltd. 17FUTU HOLDINGS LIMITED
Large securities house like Haitong International Securities and
Huatai Financial Holdings have lower rates than big banks, typically
0.15–0.25 percent of transaction amount per transaction, but still the
same minimum charge of HKD$100.
Bright Smart Securities, a locally well-known securities brokerage
house, generally has low brokerage commission rates and primarily
focuses on providing online brokerage services in Hong Kong. It
covers services from its securities, futures and options brokerage
in Hong Kong to a wide range of financial products traded on the
U.S. and Singapore exchanges. It charges Hong Kong clients a rate
of 0.0668 percent (with a minimum charge of HK$50) of transaction
value for online securities trading, and 0.085 percent (with a minimum
charge of HK$50) of transaction value for securities trading through
telephone orders.
To compete with newcomers like Futu and Tiger Securities, Bright
Smart Securities just announced that it will lower its commissions to
zero for new customers from mainland China. Also, for the first year,
mainland clients will be credited with HKD$5 per each Hong Kong
stock and A-share transaction.
“With this promotion, we hope to attract 200,000 new mainland
customers in the near future,” explained the chairman of Bright
Smart.
Although the promotion is large and unusual – no commission
plus extra rebate, we believe mainland clients would still prefer
mainland-developed trading apps like Futu, Tiger, or Snowball.
People prefer to do business with like-minded people.
Eventually, all brokers are likely to be offering zero commission as
costs become less of a concern. It’s the user experience (simplified
Chinese interface instead of traditional Chinese interface in Hong
Kong), and online chatting community functions that could eventually
win the heart of mainland users.
F) Shift of Revenue – From Commission to Margin Interest
Futu had a user base of 5.6 million with more than 502,000 registered
clients and more than 132,000 clients with assets in trading accounts
as of Dec. 31, 2018. For the year 2018, the company recorded
HK$907 billion (US$115.8 billion) in total trading volume for clients. It
held HK$50.9 billion (US$6.5 billion) in client assets at the end of the
period.
Currently, Futu receives most of its income from brokerage
commissions, handling charges and interest income.
For all of 2018, the company generated total revenue of HK$811.3
million (US$103.6 million), representing a 159 percent increase from
the year before. Over the past three years, Futu’s gross profit margin
has grown significantly. Driven by the increase of financing income
for applications of shares in connection with IPOs and other handling
charges income, Futu’s gross profit margin grew from 48.2 percent
in 2016 to 69.24 percent in 2018, signaling that a more efficient
management push is generating more profit for every dollar of labor
cost involved.
18 CapitalWatch Research - Futu Holdings Ltd.FUTU’S GROSS PROFIT MARGIN
900,000 90
811,343
800,000 80
700,000 70
69.24%
600,000 65.00% 60
561,749
500,000 50
48.20%
400,000 40
311,663
300,000 30
202,561
200,000 20
100,000 87,015 10
41,946
0 0
2016 2017 2018
Gross Profit (in thousands, and HKD$) 41,946 202,561 561,749
Total Revenue (in thousands, and HKD$) 87,015 311,663 811,343
Gross Profit Margin (in thousands, and HKD$) 48.20% 65.00% 69.24%
Source: Company Data, CapitalWatch Research
In addition, Futu Holdings disclosed in its recent prospectus that it
will continue to maintain and enhance its relationships with Futu’s
funding partners for its margin financing business. It said it also
plans to expand its service offerings from online brokerage services
to margin financing services and to other new service in the future.
Faced with growing competition in the online brokerage service
industry, we expect every company to be offering zero commission
trading eventually, and even traditional brokerage houses that have
broader range of services are rolling out a series of promotions.
Relying only on brokerage fees to support the business is not only
unrealistic but also risky in the long run.
Currently, Futu derives a significant portion of its revenues from
commissions and fees paid by clients for trading securities, but the
percentage in relation to total sales is decreasing. In 2016, 2017,
and 2018, Futu’s brokerage commission income and handling
charge income amounted to HK$74.5 million, HK$184.9 million, and
HK$408.0 million (US$52.1 million), representing 85.6 percent, 59.3
percent and 50.3 percent of its total revenues during the three years,
respectively.
CapitalWatch Research - Futu Holdings Ltd. 19FUTU HOLDINGS LIMITED
In 2016, 2017, and 2018, Futu’s revenue from interest income derived
from margin financing and securities lending businesses amounted
to HK$1.8 million, HK$65.5 million and HK$226.1 million (US$28.9
million), representing 2.0 percent, 21.0 percent and 27.9 percent
of its total revenues during the same years, respectively. For the
same years, Futu’s interest income derived from bank deposits were
HK$4.0 million, HK$34.1 million, and HK$123.8 million (US$15.8
million), representing 4.6 percent, 10.9 percent and 15.3 percent of
its total revenues during the same years, respectively.
Futu’s shift of revenue is apparent from the following chart.
FUTU’S CHANGING REVENUE SOURCE
5%
2018
7% 2017
7.73% 2016
6.70%
Brokerage Income
Interest Income
34%
Other Income
50%
59%
45%
85.62%
Source: Company Data, CapitalWatch Research
G) Faith in “Good Products” Underpinned by Independent Technology
Futu has attached great importance to its user experience and is
committed to providing “good products” to users. As the company’s
founder Mr. Hua Li said, “only users have the best sense of ‘good
products’ and they totally understand what is good and what is bad.”
With such a faith in “good products,” Futu has been making constant
efforts and progress in improving its user experience by perfecting
Futu NiuNiu, the flagship trading software of Futu. For example, to
give users a better version of Futu NiuNiu, Futu updated the versions
52 times touching upon almost 1,300 functions in 2016 alone.
20 CapitalWatch Research - Futu Holdings Ltd.Another example is that Futu has taken the unusual step in
successfully waiving commission fees for users on their birthdays.
Although it seems to be an easy move, there were technical
challenges about requiring data needed to match the users with their
birthdays. With the strong belief and persistence in “good products”
and “good user experience,” the tech team eventually overcame an
array of difficulties and managed to waive the commission fees for
users on their birthdays. Such a small, yet meaningful, move has
been welcomed by users, who believe that Futu does care about
them and has been truly making efforts to give them the best user
experience and benefits as well.
The faith in “good products” and “good user experience” is also
reflected in the delicate handling of Futu’s logo on its invoice. In the
online brokerage industry, 99 percent of brokerage firms provide
their invoices with logos that are not vector graphics. If the logos
are magnified, they become blurry. However, Futu, which noticed
this problem, made its logo on the invoice a vector graphic. Such a
detail-oriented attitude gives Futu a better position to win users’ trust.
It is no wonder that Futu has been awarded by KPMG with China’s
Top 50 Fintech Firms for three consecutive years.
H) Considerable Public Attention
Futu has been receiving public attention in China with a peak in
December of 2018. According to Baidu Search Index, which indicates
how much attention is given to a particular company by the public,
Futu’s search index is around the national average with fluctuations
during the past half year. It appeared more in people’s researches
at the end of 2018, but less in the early 2019. It indicates relatively
less public attention to Futu. Also, if we look at the information index,
which measures the popularity in the topics of people’s discussion,
we can also find that Futu is less discussed by the public. One of the
possible explanations is the decreasing public attention to the entire
online brokerage industry in China, which can be proved by the fact
that almost all online brokerage companies in China have decreasing
search indexes.
Futu Search Index vs. National Search Index
Source: Baidu Search Index
CapitalWatch Research - Futu Holdings Ltd. 21FUTU HOLDINGS LIMITED
Futu Information Index vs. National Information Index
Source: Baidu Search Index
At the same time, if we look at the media index that measures media coverage, Futu was widely reported at
the end of September 2018, end of December 2018 and in January 2019. It is fair to conclude that Futu has
been receiving significant media coverage, which further proves its importance and significance to the entire
industry.
Futu Media Index vs. National Media Index
Source: Baidu Search Index
Also, if we compare the research index of Futu to that of Tiger Securities, another leading online brokerage
company in China, Futu has been receiving less attention than Tiger Securities in the past half year. There
are two possible explanations for the decreasing public attention of Futu. One could be the result of the rising
Tiger Securities, which has been developing quickly in recent years and taking more market share. Another
possible explanation is that Futu has already been a strong brand with cultivated and stable trust with users.
This existing familiarity would explain why they do not search Futu as much as they did in the past.
22 CapitalWatch Research - Futu Holdings Ltd.Futu Search Index vs. Tiger Securities Search Index
Source: Baidu Search Index
I) Diverse Profile of Futu’s Users
It is useful to look at Futu’s user profile for both age and geographical
distributions to better understand the company. According to Baidu
Search Index and 360 Search Index, Futu has been popular among
the three major areas in China, including Guangdong province,
Beijing, and Shanghai. In particular, Guangdong province, the largest
economic province in China and a neighbor of Hong Kong, has the
largest number of Futu users.
If we dig further, we find that Futu has attracted a large number
of young and middle-aged users with a breakdown of 75 percent
men and 25 percent women. It is a good indicator for Futu’s growth
potential since it is particularly attractive to the most dynamic group
of people with higher income.
Futu’s User Profile – Geographical Distribution
Source: Baidu Search Index
CapitalWatch Research - Futu Holdings Ltd. 23FUTU HOLDINGS LIMITED
Futu’s User Profile – Age Distribution
Source: 360 Search Index
J) Incredible Trust between Futu and Users
Futu’s dedication, commitment, and persistent efforts to provide
“good products” are rewarded by incredible trust built through time
between Futu and its millions of users. Not only does the company
receive consistently positive feedback from new users, but it
also builds on and strengthens the trust from existing users. The
overall feedback and comments include reviews that focus on the
company’s great “Tencent gene” with great technology, “amazing
user experience” with friendly interfaces of the trading software, and
low commission fees. The trust between Futu and its users is one
of the crucial factors for Futu’s success in China’s online brokerage
industry.
We have widely searched users’ comments on their experience with
Futu Holdings from the major discussion platforms, such as Xueqiu,
Zhihu, Baidu Zhidao and Options BBS.
Futu’s software is really great. We
can feel and see the considerable
efforts made by Futu, a company
with Tencent gene, to provide a
good trading software.
It’s so great to trade US, HK and
A shares using just one trading
software.
Futu Securities is an internet
broker invested by well-known
investors, such as Tencent and
Sequoia. Its Tencent gene and
technology enable it to provide
the most timely market information
which cannot be offered by
common platforms.
24 CapitalWatch Research - Futu Holdings Ltd.I strongly prefer Futu, because it
provides a more friendly interface
which is easier to operate. This is
particularly attractive to individual
investors.
Which US stock broker is better,
Futu or IB?
I h a v e u se d b o th a n d I p r e fe r
Futu, because Futu has a more
convenient way for users to open
accounts and has no threshold for
the initial funds. Also, its trading
platform is user-friendly and
offers a great user experience.
Given the above advantages, it is
particularly attractive to individual
investors who are trading US
stocks.
If I have to choose one, it must be
Futu!
Futu has a much better interface
and operation functions, which
are more friendly than IB. I had
bad experience with IB before. It
was even very difficult for me to
figure out how to open an account
at IB. It was frustrating.
About commission fees: Futu just
released the new commission fee
structure. The adjustments about How is Futu Securities ?
commission fees are incredibly
considerate and beneficial for its
users.
Futu Securities was established
in Hong Kong in the year of
2012. It is recognized by Hong
Kong Securities and Futures
Commission (code: AZT137).
It finished C round financing in
June, 2017 with 145.5 million US
dollars, and has become one of
the unicorns in this industry.
Futu Securities has been a leading
internet broker. It was awarded
Best Hong Kong Broker in 2015,
Top 100 Chinese Companies with
Innovation and Growth in 2015,
and Top 50 Hurun New Finance in
2016.
As one of the earliest users Is Futu Securities safe ?
of Futu, I have witnessed its
rapid growth and increasing
competitiveness in this industry.
Brand awareness and trust are
not built in one day. I strongly
believe that Futu will gain trust of
more and more users.
I have been using Futu since I
started trading stocks.
CapitalWatch Research - Futu Holdings Ltd. 25FUTU HOLDINGS LIMITED
I am one of the earliest users of
Futu. I am still using it now. It is
absolutely safe.
Very professional trading
software!
K) Risks
i. Competition in the U.S. market
The company plans to use the net proceeds of this offering
for general corporate purposes, including research and
development, working capital needs, and increased regulatory
capital requirements of the HK SFC and regulatory authorities
in other jurisdictions as a result of the business expansion.
Expansion in the U.S. to serve customers who reside in that
country could face potential difficulties given the highly
competitive environment. Although the company expects
to target its products and services to the large investment
community of Chinese nationals and immigrants, current
offerings from online brokerages, including operations run by
traditional banking and brokerages houses, are likely to make
entry challenging. Much of the industry in the U.S. remains
dominated by long-time and well-known institutions that
increasingly offer no-fee trading options online with additional
investment advisory services.
In addition, new technology has allowed the influx of
many non-traditional competitors that offer mobile-based
applications to a mostly younger, affluent population that has
increasingly become a profit center for investment services.
Marketing and sales expenses, in addition to needed
administrative and customer service operations in the U.S., are
likely to make entry to the market risky in terms of penetration,
brand recognition, and profitability. Identifying and catering
products and services to a targeted population segment of U.S.
investors could be successful, but carries many challenges
that would need to be surmounted.
ii. Lack of license in China
Hong Kong-based Futu enables investors to see live data
and invest in Hong Kong and U.S.-listed shares using funds
deposited in overseas banks. While the company adheres
to all regulations involving overseas markets, potential risk
remains involving investors from mainland China.
Under PRC laws and regulations, the company explains in its
prospectus, “no entity or individual shall engage in securities
business without the approval of the securities regulatory
authori ty of the State C ounci l .” H ow ever, the company
maintains that it does not conduct any applicable operations in
mainland China as its services, through affiliated businesses,
are not in the securities brokerage business.
26 CapitalWatch Research - Futu Holdings Ltd.Inquiries have been received from regulators in China,
however, and the company “has taken measures” to resolve
any questions of compliance, the company said in its filing.
Further questions remain regarding certain regulations
pertaining to the need for all investment institutions to
safeguard against money-laundering and illegal transfers
of funds. Futu has received questions regarding its
anti-money-laundering procedures as well as the methods
employed for onboarding clients from mainland China.
Despite review of corporate counsel and measures taken to
respond to regulatory concerns, uncertainties remain should
the application of future laws and regulations change in fact or
in interpretation.
L) Industry Insiders’ Opinions
“At the forefront of two dynamic and rapidly intersecting markets,
Futu is well positioned to leverage an expanding affluent class
in China with investable assets coupled with the new technology
allowing global transaction funding into securities markets.
We expect Futu to be a leader in leveraging these burgeoning market
opportunities through its proprietary trading platforms and low-cost
structure for consumers.”
Yulin Song, Executive Director of Goldman Sachs China
“Futu has experienced a sharp revenue growth trajectory, likely a
cause of its relationship with Tencent that results in greater capital
efficiencies and stronger growth metrics. There is a significant market
opportunity for garnering increasingly affluent Chinese investors
who are interested in investing in overseas markets, especially in the
wake of highly volatile mainland China stock markets in Shanghai and
Shenzhen in the past few years.
FHL competes with another Chinese company seeking to go public,
Up Fintech (Tiger Securities), which is much smaller and has
unattractive financial metrics by comparison.
As to valuation, FHL management is asking investors to pay an EV/
Revenue multiple of 9.54x, which is a relative bargain compared
to that of Interactive Brokers at 16.96x. However, the firm has half
of Interactive Brokers’ EBITDA on an enterprise value basis and a
fraction of its earnings per share.”
Donovan Jones, Senior Equity Analyst and the Founder of
VentureDeal, a North America technology venture capital database.
“Futu Holdings Ltd., a Hong Kong-based online broker will debut
Friday March 8, 2019 in the United States. They have a slick mobile
centric tool aimed at global market participants, and offer a solid
product with excellent graphics when I tested it compared to the TD
Ameritrade product.
They also have pedigree which include Tencent, Sequoia Capital
China and selected Goldman to deliver the IPO placement, note also,
in 2017, they raised $145.5 million in a funding round at a valuation
of about $1 billion which comes through in the tight technology the
developers put together in the software package for users.”
Steve Kanaval, Trader/Portfolio Manager at Chicago Arbitrage Group.
He ran the Morgan Stanley Derivative Prop Trading for the firm
specializing in Index Arbitrage.
CapitalWatch Research - Futu Holdings Ltd. 27C A P I A L
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