Financials Author: Skye Lan Editor: Luke Sheehan Feb 18, 2021 11:44 AM (GMT+8)

Futu Securities' stock surged upwards by 11 times over the last 12 months.


Futu Securities' stock surged upwards by 11 times over the last 12 months.

● Futu outperformed its main competitor, UP Fintech Holding Limited (Tiger Brokers), in many ways.

● There are still concerns about the company's large dependence on its brokerage business and the license issues in mainland China.

Retail investors in China reached 178 million, making up 12.7% of the country's population by the end of 2020. The daily trading volume reached USD 129 billion,  a 60% increase from five years ago. The increasing popularity of online trading made the security market more accessible to people, and the pandemic also became the unexpected catalyst for the development of online securities trading platforms.

Futu Securities (FUTU:NASDAQ), one of the representatives that provides brokerage and other securities services like IPO underwriting and Employee Stock Ownership Plan (ESOP), had a dazzling year. The 1Q 2020 net income was almost equivalent to the annual level in 2019 and kept growing in the following seasons. During 3Q 2020, Futu reported an 1800% increase in net income to USD 51.8 million. We expect 2020's total net income to be at least 7 times up from 2019.

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Aside from industry nourishment, the company stood above many of its competitors. 

A bull versus tiger battle

Named and marked with a bull as logo, Futu also brought the 'bull market' to its shareholders. The company's stock price surged 11 times, from around USD 11 per share to over USD 120 in the last 12 months. 

Looking at its main competitor, Tiger Brokers (TIGR:NASDAQ), a Chinese brokerage that also runs an online trading platform in the United States and went through an IPO during the same time as Futu in March 2019, Tiger has only seen its shares rise up from USD 10 to USD 26.5 over the past two years. 

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Aside from the stock prices, Futu's income also exceeded multiple times that of Tiger Brokers, with the gap continuing to grow. After five years of losses, Tiger Brokers reported a net income of USD 4.9 million in 3Q 2020, due to a prospering industry environment. In contrast, Futu has remained profitable since early 2018 and reported a net income of USD 51.8 million in 3Q 2020, 10 times that of its main competitor. Tiger Broker's share price saw a rare increase after the announcement of its positive 3Q financial results. We believe this is the result of the upward industry trend – Futu still performed comparatively better.

The 'bull' wins again from an operation perspective. Paying clients of Futu and Tiger reached 418,000 and 215,000, the total client assets reached USD 26.8 billion and USD 10.9 billion respectively by the end of Sept. 2020. The 'bull' is now something of a double-sized tiger.  

The interest income, which mainly comes from margin trading, also proves Futu as the stronger company. Higher interest income is considered to have more securities products, therefore making it more attractive to investors. Futu reported continuing growth in interest income. During 3Q 2020, Futu achieved a year-over-year increase of 139.9% in interest income, to USD 35.7 million. Operating in the same securities markets, Tiger reported an interest income of USD 8.1 million, with a growth of 36.8%, during the same period. So, it can be concluded that Futu is more competitive.

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So, what led to Futu's robust growth?

There are two main differences in the business strategy that distinguished Futu from its competitors. First, Futu chose to develop the trading platform by itself, which is more cost-effective and sustainable, while Tiger's system is based on third-party software. Also, Futu is always actively applying for licenses by itself to support its overseas deployment, while Tiger's licenses are mainly obtained through acquisitions. Therefore, Futu is now the largest and the most-licensed online securities company in China.

Behind the spotlight

Of course, this does not mean Futu can lay back and relax.

When looking into Futu's revenue structure, we found that it heavily depends on the brokerage business. Futu has been shifting its focus from brokerage business to deploying more diverse services since last year. The percentage of commission fees increased and took up 60% of the revenue by the end of 3Q2020, from 48% at the end of 2019.

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The strategy of using low commission to attract traffic is not a long-term solution. The revenue of Futu still depends on commissions and fees income, which has no competitiveness or difference. The decreasing brokerage commission fees in the industry increased the pressure on online securities companies.  According to the Securities Association of China, the industry’s average commission fee decreased from 0.099% in 2010 to 0.03% in 2019, and a few US online brokers even canceled their commission charge. So, it is crucial for Futu to get rid of its dependency on commission fees as soon as possible. 

In addition, the company hasn't acquired the related licenses in mainland China, which put an investment limit to individual investors at USD 50,000 per year, which affects the revenue. Though the limit might be acceptable to most retail investors, this unregulated situation adds fear and insecurity. The Chinese government even stated that the services provided by the company are not protected by Chinese laws. 

We believe other securities services will be resumed after the pandemic is over, and Futu will be less dependent on the brokerage business, which is expected to generate a more sustainable revenue growth. But the license issue remains concerning.