ANALYSIS: Futu Holdings is Growing by Attracting a Younger Demographic
Hong Kong protests aside, Futu is technologically far more advanced than its competitors in the space offering a fully digitized experience, and thanks to investments from Tencent, the company will soon be expanding its footprint significantly.
Following one of the most intense weekends yet in the Hong Kong protests, Futu Holdings Ltd. (Nasdaq: FHL) released its financial results for the second quarter. The company is the largest online overseas broker in China and their recent earnings present a barometer for how conflict in the region is affecting businesses on the ground. And, looking at the numbers, FHL showed strong growth momentum in a number of key data points.
First, client acquisition for Futu showed strong year-over-year increase in both total registered clients and total paying clients. The total number of registered clients increased by 64.7 percent to 614,504 and total paying clients increased 50.5 percent to 164,717. Both total users and total client assets rose healthily 26.5 percent and 22.9 percent, respectively. Yet, some of the most interesting data is below the surface for Futu. For example, the retention rate of paying clients is at 98.1 percent and gross margins increased to 75.5 percent. The latter is especially impressive as the company rolled out a number of new financial products for customers – more on that below. Futu also saw brokerage commission fees increase by 36 percent, which accounts for about 47 percent of the revenue for the quarter. All told, FHL missed earnings estimates by a hair - 4 cents – but beat on revenue estimates by $3.76 million. Considering the geopolitical forces at play in the region – Hong Kong protests and the ongoing Sino-U.S. trade war – this was a solid step in the right direction, and if situations do find a resolution, Futu could see ever-improving fundamentals.
"Our superior technology infrastructure has always been a major source of our competitive advantage," said Leaf Hua Li, Futu's chairman and chief executive officer. "In May, we officially launched Money Plus, a money market mutual fund distribution platform, in Hong Kong, which marks our initial foray into the wealth management business. In June, we became the first Chinese broker to offer full market-depth for US option quotes, with quote refresh rates that are much faster than our peers in the region. Our technological capabilities continue to redefine traditional investing for individual investors who we believe deserve a best-in-class trading experience."
Easy-to-use wealth management tools like Money Plus have also attracted a younger demographic in Mainland China and in Hong Kong. Li sees this as a focus for the company in the future. In the earnings call, he said that the average client age on the platform is 35 – the simple interface and clean customer experience are drivers there – but Futu's client base also appears to be part of the growing elite in the region as their average asset balance was HK$415,000 (more than $50,000). Li and company are looking to keep their clients engaged in the markets, even during tough times, with an array of products and tools.
"Like we did for our trading and margin financing services we will surround our wealth management products with news, research, and powerful analytical tools, providing our clients with a data rich foundation to simplify their investing position making profits," Li explained. "We want to empower our clients with powerful investor education. We are still experimenting with our wealth management business, but in time we believe that it can help expand our client acquisition capabilities, increase average assets per client, improve client retention, and provide a more stable stream of revenue."
ESOP (employee stock ownership plans) was another boost for FHL's bottom line as the company added 11 new clients in the second quarter, including the recently IPO'd DouYu International Holdings Ltd. (Nasdaq: DOYU). These types of companies and their employees fit into the client base described above and could fill in the gaps in client acquisitions until the region quiets down. Though, it should be noted that FHL was rather successful marketing in Hong Kong when you look at the numbers as the company increased paying clients in the embattled region by 115 percent year-over-year.
Following a question from Goldman Sachs analyst, Weicheng Tang, Futu's chief financial officer Arthur Chen directly addressed the protests in Hong Kong and how he thought they might affect metrics in the future specifically adding the new clients Li alluded to above. Chen acknowledges the inability to market effectively during this time, which is taxing as new products are being rolled out, but did point out an upside.
"…In terms of financial impact, I think for the revenue and also for the cost side so far we think the situation is quite manageable," Chen responded. "We think it will accelerate the market consolidations in the long term. As a leading player in this space, we actually will be better off in such market consolidations. Having said that, I think the negative impact mainly relies on the new client acquisitions particularly in Hong Kong because of the recent events."
Hong Kong protests aside, Futu is technologically far more advanced than its competitors in the space offering a fully digitized experience, and thanks to investments from Tencent Holdings Ltd. (HKEX: 0700), the company will soon be expanding its footprint significantly.
On top of this, MooMoo Inc., Futu's wholly-owned subsidiary, is ramping up marketing and positioning the app for widescale adoptions on a global scale. The commission-free trading app enables users to trade stocks, ADRs, ETFs and options right from their phone. MooMoo also has the fast order processing that many users recognize from Futu. This app and the company's focus on the millennial Chinese with mature wealth management products is ultimately a reason to like this quarter's performance and to expect more as the company truly grows beyond Hong Kong.
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