Future Holdings (NASDAQ: FUTU) is a digital brokerage and wealth management platform based in Hong Kong and China. Futu and its subsidiaries provide investment services to individual investors through its one-stop digital platform. Its platform is known for its social features, which provide users with a network that connects them with users, investors, companies, analysts, media and key opinion leaders. Its primary fee-generating services include trade execution for stocks, ETFs, warrants, options and futures, as well as margin financing and securities lending.
The company has been posting poor results since the start of 2021. It is currently down nearly 80% from its all-time high, trading at $41.6 per share. The massive drop in the stock price is due to the sharp drop in growth stocks, the SEC’s concern about the delisting of Chinese companies and the fact that the Chinese government may impose stricter rules on companies. financial. Despite being down a ton, I think Futu is still not investable. Political concerns aside, the current market volatility is exerting strong headwinds on the company, and it faces intense competition as the industry becomes increasingly saturated. Recent financial results are also very disappointing with declining revenues. Therefore, I think Futu is a sell at the current price.
Regulatory risks are always a big concern when investing in Chinese companies. Last November, the Chinese government imposed a new personal data privacy law, aimed at regulating the export of personal data and protecting its national security. The new law is likely to impact Chinese online brokers like Futu and Up Fintech, as they help locals invest in foreign stock markets such as the United States, which could break the law.
Futu also faces delisting risks from the SEC. In April, Futu was one of the last five stocks to be added to the list of companies subject to expulsion from the US stock market. In late May, Chinese mobility company DiDi informed the NYSE that it was pulling out of the United States and planning to list elsewhere instead. Ongoing political issues are likely to continue to pose unprecedented risks to the business, creating enormous near-term uncertainty.
Disastrous financial market
The turmoil in the financial market over the past few months has had a significant impact on Futu. The company relies heavily on trading volume, margin financing and securities landing to make money, but recent volatility has significantly reduced investors’ appetite for trading and investing. The massive sell-off in growth stocks, crypto, SPAC, and meme stocks has also wiped out many young investors, who make up the core population of Futu. The general market sentiment is very negative as we have entered the bear market. Many investors are now inclined to sit on the sidelines and wait for the dust to settle before investing again.
Leaf Li, CEO, on market impact
“Total client assets decreased 16.5% year-on-year and 5.3% quarter-on-quarter to HK$386.0 billion due to heavy mark-to-market losses on our clients’ holdings. Meanwhile, the market correction weighed on the margin funding balance, although partially offset by increased securities lending activity.”
The somber sentiment is showing in the IPO market, which has been extremely quiet. According to FactSet data, 1,073 companies went public in 2021, raising $317 billion, while in the first half of 2022 the total was 92 companies, raising just under $9 billion. This is the lowest since 2009, as shown in the chart below. The same thing happens for SPACs. The total number of SPACs that went public in the first quarter was down 57% year-over-year, the lowest in eight quarters. I think the volatility will last for some time as inflation continues to persist at elevated levels as the economy weakens. This will continue to show headwinds on Futu as trading volume is likely to remain suppressed in the near term.
With Futu shifting its focus away from China due to regulatory issues, I believe the total addressable market for the company going forward is minimal. Its strong customer growth in Hong Kong (its main market) is likely unsustainable as the country has a population of only 7 million, which has held back its growth. It should be noted that the increase in the number of customers is probably just smoke and mirrors. A large number of new users are probably not really interested in investing and are not likely to bring income to the business. Most of these users are likely acquired through promotions and are only on the platform because the company is offering free shares. Consequently, in the latest results, we have seen the number of new customers increase while quarterly revenues have decreased.
The company is trying to expand into countries like Australia and Singapore to expand its user base and revenue streams. However, the investment brokerage market in these countries is already very saturated with tons of competitors in the space. For example in Australia, it faces competition from traditional banks like Commonwealth Bank, neobanks like Revolut, and brokers like CMC Market and Interactive Brokers (IBKR). In Singapore, it faces competition from Tiger Brokers (TIGR), DBS (OTCPK:DBSDF), TD Ameritrade (SCHW), etc. I also think that Futu has no competitive advantage in this market. The company prides itself on its user interface and user experience, but other companies are quickly catching up, now providing the same, if not better, experience to users. Traditional banks and neobanks also have a slight advantage as they allow users to easily manage all their finances in one place, and transfers can be made instantly.
Futu Holdings released its first quarter financial results in June and the results are very disappointing. Total number of paying customers was 1.3 million, up 67.9% YoY (year-over-year), total number of registered users was 2.9 million, up 48.7% , while the total number of users was 18.1 million, up 27.1%. It should be noted that the company’s definition of paying customers refers to users with assets in their trading account, rather than users who trade. As mentioned above, the customer growth is likely due to promotional efforts, which include cash coupons or free shares for newly deposited accounts. Therefore, despite the increase in the number of customers, the volume of transactions and revenue were still declining.
Total revenue for the quarter was $209.5 million, down 25.6% year-over-year from $282.6 million. Brokerage and handling fee revenue was $123.5 million versus $169.2 million, down 27% year-over-year. Interest income was $73.4 million, down 12.7% year-over-year from $84.4 million. This is attributed to the decrease in AUM and trading volume. Total client assets decreased 16.5% year-on-year to $49.5 million, transaction volume decreased 41% year-on-year to $166.7 billion, while funding balance Margin and Securities Lending fell 6.8% to $3.3 billion.
The company’s profitability has also contracted considerably. Net income fell 50% from $149 million to $73 million. The net profit margin was 34.8% compared to 52.7% a year ago. Diluted net earnings per share were $0.49, down 52.5% from 1.03. Despite the disappointing results, stock-based compensation actually increased 299% from $2.2 million to $6.5 million this quarter. The balance sheet remains healthy with $769.3 million in cash and $642.4 million in debt.
In conclusion, I think Futu is best avoided for now. The various political stakes create many unpredictable risks for the company that could harm its fundamentals. The recent sentiment in the financial market has been really negative and the trading volume has decreased significantly, which has a huge impact on the company’s turnover. Its expansion to other countries is also very difficult because the market is already very saturated with many competitors in the space. The company’s finances are very disappointing with revenues and net profit plummeting, despite the increase in the number of users. I think the numbers will continue to be weak as the company faces several headwinds at once. Therefore, I view Futu Holdings as a sale.