Futu Bull-Bear Debate: Does The Recent Rally In Chinese Stocks Have Legs?

Chinese online brokerage platform Futu Holdings Ltd FUTU is understandably a polarizing topic among analysts and investors.

The stock is down 68.7% in the past year as both Chinese and U.S. regulators have cracked down on U.S.-listed Chinese stocks. However, the stock has rebounded by 66.4% in the past month driven by big first-quarter earnings and revenue beats.

The impressive first-quarter numbers were enough to convince Bank of America analyst Emma Xu to upgrade Futu from Underperform to Buy on June 10, but Xu's conversations with investors following the double upgrade suggest not all traders are on the same page when it comes to Futu.

Related Link: Futu Holdings Scores Double Analyst Upgrade Following Q1 Earnings Beat

Risks Remain: On Friday, Xu discussed a new survey that reveals investors are on the fence about Futu and other Chinese stocks. Among those surveyed, 71% of respondents said they believe the recent rally in Chinese stocks can last another three to six months, while 25% said it can last six months or longer. When it comes to playing the Chinese market rally, 32% of respondents said Futu is the best way to trade Chinese stock market strength among Chinese financial stocks. Unfortunately, 64% of respondents said they believe cross-border brokers will not be allowed to acquire new clients.

Bullish Momentum: Xu said the correction in U.S. stocks is a headwind for Futu's earnings given the U.S. accounts for between 50% and 65% of Futu's trading volume.

"However, about 20-25% of U.S. trading volume is China ADRs. And Futu’s performance was more correlated to China stocks than U.S. stocks historically," she said.

In addition, Xu said the news cycle related to the Chinese internet and new economy stocks is likely improving, and U.S. delisting risks appear to be manageable for now. Finally, continued Chinese stock market strength in the second half of 2022 would likely be a sizable tailwind for Futu.

Benzinga's Take: As the past year of Futu trading action demonstrates, the stock remains a high-risk, high-reward speculative investment. If there's one thing U.S. investors have learned about Chinese stocks in the past couple of years, it's to always expect the unexpected, especially when it comes to intervention and policy measures by Chinese regulators.

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