CFO INTERVIEW: Futu Propels Toward U.S. Launch After Hong Kong Success

The chief financial officer of the Tencent-backed Hong Kong brokerage firm said Futu focuses on three indicators of growth: the new paying clients, retention rate, and client's assets under management. All three showed solid results in the first quarter.

Anna Vodopyanova
    May 26, 2019 5:10 PM  PT
CFO INTERVIEW: Futu Propels Toward U.S. Launch After Hong Kong Success
author: Anna Vodopyanova   

Futu Holdings Ltd. (Nasdaq: FHL), posted strong results driven by the growing user base and new products in its first financial report since becoming publicly traded in New York.

The Hong Kong-based, tech-driven online brokerage firm reported in a statement Friday $30.1 million in revenue for the first quarter, up 37 percent year-over-year. Net income, it said, was $5.8 million, or 9 cents per share.

The growth was driven by the increase of Futu's new paying clients and new service offerings, said its chief financial officer, Arthur Chen, in an interview with CapitalWatch Friday. Up nearly 60 percent from a year ago, Futu's paying clients reached 149,000 by the end of March, while client assets under management rose 21 percent to $7.9 billion.

While the majority of the users of Futu's online and mobile app NiuNiu have been the millennials in mainland China, the company sought to attract more Hong Kong users this year. And it has achieved its goal. In the first quarter, Chen said the number of paying users in Hong Kong has doubled year-over-year, outpacing the increase in China-based clients. He said this has also been driven by the Hong Kong government's tech-oriented initiatives such as a fast payment and easy money transfer system. He also said he anticipates the same growth in the second quarter.

"I THINK THE REASON NUMBER ONE FOR OUR USER GROWTH IS: WE MAINTAIN A VERY GOOD PRODUCT" - ARTHUR CHEN, FUTU CFO

In addition, Chen noted the high client retention rate at Futu, which was 98 percent in the first quarter.

"As long as we can engage more and more new clients and keep a high retention rate at Futu, the clients' assets will increase and allow us to create long-term values to our shareholders by gradual monetization of the assets," he said.

NiuNiu offers online stock trading with low fees and live feeds and aims to provide quality user experience. Unlike other broker platforms, Futu allows mainland Chinese investors to trade in Hong Kong and the United States.

Recently, Futu announced the launch of its enterprise service brand "I&E" that integrates employee stock ownership plan (ESOP) with its IPO subscription solutions. Futu provides services to Chinese companies seeking to trade on overseas stock markets, from pre-IPO to public trading. Thus, in May, it conducted IPO services for a retail platform, Yunji Inc. (Nasdaq: YJ), and China's rival to Starbucks, Luckin Coffee (Nasdaq: LK), which raised $121 million and $561 million, respectively.

Chen said, more IPO clients are on the way, as 15 Chinese companies have already opened their doors to investors on Wall Street this year.

Futu was one of them. Backed by China's tech giant, Tencent Holdings Ltd. (HKEX: 0700), Futu completed its IPO in March, raising $170 million in the offering and the concurrent private placement of shares. Its stock lifted off at $12 per American depositary share and closed up 28 percent on debut day.

Until late May, when the trade truce between Beijing and Washington went downhill, its shares remained above IPO level, rising as high as $19.28. More recently, however, Futu's stock was sliding. On Friday, it closed at $11.53 per share, 6 cents higher on the day.

Chen commented on the stock movement: "The recent headwinds from the Sino-U.S. relationship and the overall equity market volatility may have an impact on our stock. Our business is highly correlated to the stock markets where our clients are trading. Maybe certain investors are concerned whether our business will see an impact from these capital market movements."

"THE BEAUTY OF OUR BROKERAGE IS THAT DESPITE THE MARKETS' VOLATILITY, OUR CLIENTS ARE STILL VERY LOYAL"

The CFO also said that Futu does not worry about the things it cannot control, such as political uncertainty. He continued, "This is the nature of our business and we cannot control it. We focus more on whether our platform can engage people and retain them. If you take a longer time cycle perspective, markets always have ups and downs. As time goes by, our efforts will be rewarded."

The company has also been planning to expand into the U.S. market with its new product, MooMoo. In fact, Futu has received the U.S. broker-dealer license last year and has just scored a preliminary clearing license in the United States and expects to complete all remaining licensing procedures within the next two weeks, according to Chen. The launch of the U.S. line is yet unscheduled, he said, as the company aims to develop an entirely new product with premier user experience and low transaction costs.

"WE WANT TO MAKE SURE MOOMOO IS SUPER USER-FRIENDLY BEFORE WE LAUNCH IT IN THE U.S. MARKET"

Boosted by the IPO funds, Futu has been investing heavily in R&D and marketing. In the first quarter, it reported operating expenses of $14.4 million, up 88 percent year-over-year. Research and development expenses of $6.8 million jumped 73 percent, while selling and marketing expenses have tripled to $4.1 million from a year ago, according to the report.

Chen said, "The sufficient capital base will support our growth strategy in terms of margin financing service and our new service offerings. For the use of proceeds, a very meaningful portion will continue to be invested in marketing and R&D. [The expenses] increased meaningfully because it is important for us to acquire clients to grow our market share, while R&D is our core emphasis because it is a key to our long term, sustainable growth strategy."

Looking ahead, Chen said he expects revenue growth from the trading commission, which contributed the majority of Futu's proceeds ($14.6 million, up 21 percent y-o-y in Q1), to carry on to the second quarter. He also said the company expects to see continuing user growth.

Futu is now covered by analysts at Goldman Sachs ("neutral," price target of $17.62 per share), UBS ("neutral," $19.50), and BOCI Securities.

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